Janet E. Warren, managing director and national claims practice leader with Beecher Carlson, is one of the nation's most accomplished claims auditors. With more than 20 years in the business, she's honed her craft to a fine art. In a June telephone question-and-answer interview with Risk & Insurance Managing Editor Cyril Tuohy, Warren divulges some of the secrets to a successful claims audit and where she believes the future of claims auditing is headed.
Cyril Tuohy: There's no legal requirement to conduct a claims audit, is there?
No there is not. I've become much busier since Sarbanes-Oxley was passed. Some of our clients have realized that the amount of money a risk manager is responsible for in claims is oftentimes greater than the budgets of large corporations. So the thing that you need to understand is that somebody has to be watching that money that you're giving a TPA or a carrier responsibility for managing. We look at many different things when we do an audit, and there are different reasons and different goals for different type of audits.
CT: Is that a fairly easy proposition, or do you find that in some cases you've got a lot of resistance on the part of some people within the corporation.
Some carriers, TPAs, medical management facilities--they are a little cautious and defensive. I find the better the vendor, the more fully engaged and involved they are. When I was an account manager for a TPA, I always participated fully in audits. You really do not understand fully how well a TPA or a carrier is handling claims until you dig down in those files and really look at them and do an audit.
CT: Why is it necessary to have an audit in the first place? One assumes that these companies are following the rules. Do things get lost in an M&A for example, or do some people just not care. What happens, in your experience?
I was trained by the Japanese in continuous improvement, so to me an audit is really just part of that cycle of measuring and making sure that it's getting done. You've got to go in and make sure that you're meeting specs. I was also brought up in the manufacturing environment with ISO certification where you're really making sure that the things that are supposed to be getting done are getting done. To me, that applies to the service industry as well, to adjusting or anything else. Because people are involved there may be things that go awry in the process. It may be adjusters are overloaded and their case loads are higher than they should be ...
CT: There are
pitfalls to implementing audits as well. There's a money issue, there are certain financial considerations, and some resistance. Is there are any chance that audits be mandated?
I haven't seen that at all. But the state regulatory agencies do audits for their own purposes, and they look at some of the same things. Mainly they are interested in the financial reserves and whether or not the adjusters and others are complying with state rules and regulations, and sometimes they are revenue producing departments themselves. Some states do auditing more than others. We've seen that in California, of course, and some in Texas.
CT: What do claims audits typically cost?
JW: An average audit is probably somewhere between $10,000 and $15,000. Large companies have us do audits for different reasons and for more financial reasons, especially for making sure that reserves are appropriate.
CT: How long does it take?
It depends upon the experience level. Certainly someone with more experience can do them in a much shorter time. Depending upon the number of people we bring in, it's about a week-long process at the most. You don't want to take any longer than that because it takes a lot of time and effort on everyone's part. When I'm involved, we always encourage, and it usually happens, that the insureds are very involved as well.
It could be a claims manager or claims analysts that come in and actually participate in the audit. We're teaching them at the same time really what they should be looking for and what their expectations should be. So it's usually kind of an eye-opening experience for someone who hasn't done it before. It gives them a real understanding of what's really entailed and that this business isn't as easy as it may seem.
CT: Are the files electronic or paper-based?
There are still not many (claims administrators) out there that are totally paperless. And that makes it easier. We still like to go on site because it's important to meet the teams, meet the people, look at the infrastructure and analyze the processes. This is a people business, and you can't underestimate how important it is to meet the people face to face. Sometimes this is your opportunity to do that and communicate expectations. The audit is just the first step and then it's what comes out of the audit. Data is just data if you don't use it.
CT: What do people tell you when you reveal shortcomings they never knew they had. Are very grateful, or are they in denial?
I've always thought and I've always said to carriers and TPAs, "My client is paying for this. You should consider this free consulting"--especially with the people I bring in on my teams and their level of background, experience and expertise. To me, the response of the TPAs and carriers is a little bit of a temperature gauge of how good that particular vendor is. The ones that are more open get it. They realize that we're in there to help them as much as anything else.
CT: Are there any sectors in which you've noticed that audits are more pristine than
in others as far as from your client base is concerned.
JW: I can't say that any industry segment does a better job than any other. I think it depends upon the individual company and how important it is to them. That can depend on a lot of things. If it's a small piece of the pie, sometimes it just doesn't get the focus. Sometimes the more profitable the company, the less focused they are--and that's our job. Our job is to help our clients focus on what matters. That's what the audit is about--to help us identify those areas where we can really make a difference. For our clients, then it's the bottom line. It lowers their cost of risk.
CT: Is a four-year college degree required?
JW: It's not required. I think you need it. I think the higher level of logical thinking is very important, but that affects what a client pays in terms of fees to handle claims. But, oftentimes, the focus is on those upfront fees. It's harder to measure the quality of claims handing, but it's easy for a consultant to come in and say, "You know I can beat this TPA's fees by 10 percent."
Those TPA fees are usually less than 5 percent of the cost of claims. Well, if the TPA is not handling those claims appropriately, the cost of leakage between what should be paid and what is paid can be exponential to the TPA fees. One mishandled claim can be $1 million. I'm not being funny. That happens every day.
CT: And that's what you mean by leakage?
JW: Well, that's one term that's used. Remember, the only good claim is an appropriately closed claim. Let's say it's a workers' compensation claim. If the claim is not handled well, the employee may not get the appropriate medical treatment. That's not in their best interest nor is it in the best interest of their employer. So, if the TPA is not doing things right, we call that leakage, but to me it's kind of a bigger issue than that. It comes down to just handling it right. To me, claims work on a kind of squeaky wheel theory. Because everybody's busy and because everybody's got a lot on their plate, sometimes the squeaky wheel gets oiled first.
CT: When you talk about adjusting a claim in the context of auditing, do you mean changing numbers of a spreadsheet, or do you mean ferreting out mistakes?
That's a very good question. Claims adjusters literally handle the claim from beginning to end in most TPAs and carriers. What that means is on a workers' compensation claim, the adjuster makes contact with the employee, the employer and medical providers, that's handling the claim or administering the claim. Sometimes they are called claims managers. They are actually managing the process.
CT: The auditors of the claim and the adjusters of the claim are two different people, I would imagine.
Absolutely. You have an adjuster who has a supervisor and there's a branch manager, and then an account manager. I was actually one of the first account managers--that's the person that coordinates for the TPA and is a liaison between the client, the carrier and the adjuster. In my role as an account manager, I actually did auditing of files. You have internal auditors within the TPAs and the carriers that do it for reasons of quality--making sure that they are living up to their fiduciary responsibility, but normally audits are done by outside consultants, oftentimes a broker-consultant.
CT: Have you found that firms act quickly, or never quick enough, to correct mistakes?
You can't come in and do what I call a dive and swoop where you do an audit and then you leave. It's an ongoing process so it's real important that whoever is doing the audit make certain recommendations, and I don't like to do that in a vacuum. I like to get together with the TPA and say, "Here are my recommendations. I want a response from you within 30 days of what you're going to do." That's what it's all about, and it can be exciting when you start improving things. So, do they act fast enough? Of course, you're right--for me, never fast enough. But that's also the job of the consultant to make sure that the TPA or the carrier is following through with all these things.
CT: Is there a greater need for claims auditing since passage of the Sarbanes-Oxley Act of 2002?
I've seen a greater request. I think there's a greater focus by corporations because of the money that's involved in claims.
CT: That's good for you. It means you'll always be in demand.
Audits are a fun thing to do.
CT: There's a forensic quality to them ...
Yes. And realize that you can do audits for all lines of claims. I probably do more workers' compensation than liability but certainly have done medical malpractice, property and all different kinds. I'm old enough to have been trained multiline. That's not happening so much anymore. Now everybody kind of has their expertise.
CT: How does that affect the industry?
JW: I really have not seen the good in it. It goes back to those higher-level thinking skills. If you use your brain for a lot of different things, it makes you a better thinker, and so we do see some issues because of that. I've been in this business a long time, and I'm passionate about claims. To me, claims are where the rubber meets the road on anyone's risk program because if there were no claims, there would be no need for insurance or risk management programs.
September 1, 2008
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