BWC Audit Discloses Problems in BWC Adjustment Procedures

BWC Audit Discloses Problems in BWC Adjustment Procedures

Posted: December, 2006

The BWC conducted an audit of the “manual override processes involving employer experience modifiers (EM), claims costs or Micro Insurance Reserve Analysis (MIRA) reserves.” The audit disclosed problems with the BWC’s policies.

The audit reviewed transactions from January 1, 2003 to September 30, 2005. The review found that adjustments (called “overrides”) were made to the employer’s MIRA reserves or EMs (adjustments lowered the amount employers had to pay) with “very little documentation.” The report also indicates that “some of these reductions appeared questionable.”

The BWC’s Audit made six “observations” and “recommendations” based on its review. The observations below are quotes from the BWC’s report.

Observation #1: During the period of our testing, no written policies and procedures existed for the overrides of EMs or reserves, or for associated claim cost adjustments. Also, documentation for the authorization of override transactions was insufficient.

For 36 overrides, there was no documentation; 23 overrides were approved by emails, but not documented in the file (and many of the 23 adjustments approved by email just referenced approval by a member of executive staff without copying that member of the executive staff); for 33 overrides the notes either don’t describe the adjustment or include a generic reference of approval without an explanation.

The audit notes that the lack of written policies increases the likelihood that laws and procedures will not be followed, and states that “lack of adequate documentation of override transactions . . . raises questions as to the accuracy and appropriateness of undocumented transactions.”

Observation #2: Currently, the assignment of the responsibility for processing manual overrides resides within the Employer Operations Department, which results in inadequate segregation of duties over this process. Housing the area responsible for performing override transactions in the same area that is responsible for working with and assisting employers in dealing with issues can increase the potential for inappropriate transactions.

The report indicates that the actuarial department is responsible for making sure that the rates are appropriate, and points out that the actuarial department was responsible for rate adjustments until 1996, when the responsibility was transferred to the employer operations department.

The report points out that permitting a department other than the actuarial department to make adjustments increases the likelihood that adjustments will not be actuarially sound.

Observation #3: At the time of audit, no quality assurance procedures were in place to provide assurance regarding the appropriateness of override transactions processed by Supervisory/Managerial personnel. In addition, the quality assurance procedures for override transactions processed by staff in the Employer Programs Unit were inadequate to provide assurance that only properly approved transactions are processed and that such transactions are processed accurately.

The report notes the inadequate nature of reviews of override transactions, and points out the importance of internal controls to provide assurance that transactions are appropriate. The report points out that “[l]ack of adequate controls in this area increases the potential for inappropriate or fraudulent overrides.”

Observation #4: The current programming for deactivated override transactions results in an inability to easily identify deactivated override transactions in the R&P system EM Recalculation Override Listing screen. Additionally, programming for the system is not resulting in deactivated reserve overrides reverting back to the previous levels, which may result in incorrect rates for employers with deactivated reserve override transactions.

The report notes that EM overrides which are later deactivated are not reflected in the system. This failure makes it more difficult to investigate such overrides to determine whether they were appropriate and can also result in errors in rate calculation.

Observation #5: Approximately 75% of the manual overrides of employer EMs which we tested were deemed exceptions as they did not appear to follow fixed and equitable rules, appeared to contravene existing policy and/or we could find no documentation authorizing or explaining the reason for the overrides.

The report notes several instances where questionable adjustments were made. The report indicates that such adjustments “result[] in the appearance of giving preferential treatment” and “create[] the potential for allegations of favoritism.” The report also points out that such inequitable adjustments shift the burden of claims on other employers, who are charged higher rates as a result.

Observation #6: Many of the conditions giving rise to employer requests for overrides of EMs, claims costs or reserves were the result of the employers being removed from group rating programs in which they were enrolled (by their group sponsoring organizations) as a result of their claims experience. Various problems with the group rating programs have resulted in rating inequity between group-rated and non-group-rated employers, which is causing non-group rated employers to pay a subsidy to off-set the high discounts received by some groups. Based on information contained in a 2004 study by the BWC actuarial consultants, this subsidy began shortly after the inception of group rating. For the 2002 group rating year, the study indicated that the subsidy was $169 million for private employers. Annually, this subsidy amounts to approximately 8 percent of the premium revenue.

The report notes a variety of problems with the group rating system. Basically, groups are artificially creating low rates by removing employers with claims. This is contrary to the initial idea behind groups –– which was to improve safety by creating peer pressure to keep claims experiences low.

The discounted rates given groups are so low that they are insufficient to cover the groups’ claims and therefore are subsidized by non-group employers.

The report points out that the BWC has been aware of these problems for years, but has not addressed the issue.

Information courtesy of the Ohio Workers’ Compensation Bulletin. Subscribe to the Ohio Workers’ Compensation Bulletin to keep informed about the Ohio workers’ compensation system.