Tier 1 Audit Pilot Final Report
Tier 1 Audit Pilot:A Comprehensive ReportMay 2017
1Tier 1 Audit Pilot: A Comprehensive ReportExecutive SummaryBackgroundIn June 2013, the Self‐Insurance Audit Reform Advisory Committee was formed to develop anew audit process. The committee is led by The Department of Labor and Industries (L&I) and iscomprised of representatives from both business and labor.L&I in collaboration with this Committee has developed a new audit model. The new auditmodel focuses on areas of priority as recommended by business and labor, and is aimed toeducate and promote compliance with Washington State Industrial Insurance Laws.The new model is also designed to shorten the existing audit cycle ofapproximately 5 to 6 years, which was lengthy due toa broad review. The focused Tier 1 wage review tookPerformance‐Basedjust under two years to complete. Although this waslonger than first anticipated, it’s still substantiallyTier 1shortened the length of the audit cycle.The new model consists of three distinct types ofaudits: Audit sed.In addition, the performance‐based audit includes three levelsof review: Tier 1, Tier 2, and Tier 3. The level of review isdetermined by the performance in the preceding tier.Tier 2TTD/PPDTimelinessTier 3To BeDetermined
2Tier 1 Audit Pilot: A Comprehensive ReportSummary of Activities and FindingsTier 1 focused on the calculation of the injuredworker’s monthly wage which forms the basis forthe rate of compensation. The wages arecalculated as specified in RCW 51.08.178, WACs,applicable case laws, and department policies.2015‐2016 Tier 1 Audit PilotOverall Pass/Fail Results(Pop. of Eligible Employers)Did Not MeetTier 1 Threshold45%Tier 1 Wage Audits were conducted over a periodof two years, between January 2015 and December2016. Out of 358 self‐insured employers: Passed Tier 1Threshold55%162 employers passed Tier 1 with anaccuracy rate of 70% or greater.135 employers did not pass Tier 1 and willqualify for a Tier 2 Audit.61 employers were not eligible for the auditpilot due to new or inactive status and noeligible claims.Another key measurement wascustomer satisfaction. After eachaudit walkthrough an electronicsurvey was sent to the self‐insured employer and their thirdparty claims administrator.In response to the survey question“How would you rate your overallsatisfaction with the service weprovided?” the response wasoverwhelmingly positive, with86% of our customers rating“Good” or “Very Good.”HOW WOULD YOU RATE YOUR OVERALL SATISFACTIONWITH THE SERVICE WE PROVIDED?Average11%Poor2%Very poor1%Very good48%Good38%ConclusionThe new audit model is responsive, rewards compliance, and addresses program deficiencies.We believe overall customer satisfaction is high due to a focus on education before sanction.Tier 1 focused on a highly complex calculation of the monthly wage that forms the basis of time‐loss compensation for injured workers.The pilot took 1 year longer to complete than estimated due to factors, such as, developing thenew remote auditing process, lack of a standard audit management system, and the selection
Tier 1 Audit Pilot: A Comprehensive Reportfor review of complex wages. Lessons were learned and best practices were discovered by theaudit team.We observed, both with employers that passed and did not pass, a strong initiative to makechanges as a result of the audits. The walkthrough process helped facilitate this and, overall,promoted self‐correction of areas identified to improve wage calculation.Looking forward, the success of the performance‐based audit pilot will be evaluated based onthe overall results of all tiers.“It has been an honor and pleasure to serve on the audit reform committee the past twoyears. The collaboration of all parties has allowed for ongoing progress and development ofpositive solutions based on lessons learned. I am confident the new performance based tieraudit approach will effectively provide for continued education, and identify non‐complianceissues and opportunities for process improvement.” Donna Egeland Ombuds for Self InsuredInjured Workers.3
Tier 1 Audit Pilot: A Comprehensive ReportContentsExecutive Summary . 1The Audit Process . 5Background . .5Audit Timelines . 5Phases of a Tier 1 Audit . . .6Customer Feedback and Survey Results.7The Audit Results . 8Passing a Tier 1 Audit .8Audit Findings . .9Key Grouping of Methodology Errors . 11Audit Outcomes . 12Customer Feedback and Survey Results .14Lessons Learned . 15Conclusion of Findings. 174
Tier 1 Audit Pilot: A Comprehensive Report5The Audit ProcessBackgroundThe Audit Reform project started as a collaborative effort between the Self‐Insured Communityand The Department of Labor and Industries. The Audit Reform Advisory Committee was born asa result of this initiative. During the Tier 1 Pilot, the Advisory Committee was comprised of: Labor representatives,Self‐insured employers’ representatives (i.e., third party claims administrators (TPAs),self‐administered employers, etc.),L&I Insurance Services Assistant Director,L&I Insurance Services Deputy Assistant Director,L&I Self‐Insurance Ombuds, and,L&I Self‐Insurance Program Manager, Compliance Operations Manager, ClaimsOperation Manager and administrative support staff.The Committee generally meets on a monthly basis to discuss the progress of Audit Reform andmake recommendations to L&I leadership based on the perspective of their community. Theserecommendations are then discussed with the Program Compliance (audit) Team before finaldecisions are made by L&I Executive Leadership.The focus of Tier 1 is the calculation of the injured worker’s monthly wage which forms the basisfor the rate of compensation. This calculation is highly complex, which is a primary reason it wasselected as the focus of Tier 1. Newly self‐insured employers and employerswithout audit eligible claims and claims beyond 3 years were excluded fromemployer selection. Claims with disputes, final wage orders and closedclaims were excluded from claim selection.Initial Letterand Response 20 daysAudit TimelinesEach audit was initiated with a letter to the employer. The letteradvised of the claims selected for audit and requested payrollrecords, union contracts and other payroll documentation within14 working days. Once complete documentation was received thefinal audit report was due within 90 days.Since the old audit process was performed onsite, this was a new processfor both the audit team and the employers. Once the processbecomes familiar the time‐cycle is expected to shorten. An aim ofthe new model is to be less intrusive and more effective.Field Work 60 daysReporting andFinalizationAuditComplete 30 days
Tier 1 Audit Pilot: A Comprehensive Report6Phases of a Tier 1 AuditThe Tier 1 Audit was divided up into three phases:1) Planning,2) Field Work,3) Reporting and Finalization.During the Planning phase the auditor selected the most recent audit eligible claims, then sentthe list through a two‐level quality assurance review (QAR).During Field Work the Program Compliance Representative sent the initial audit letter to theemployer. Once complete documentation was received the auditor calculated wages for eachclaim and compared it to the employer’s calculations. Field Work was the lengthiest phase ofthe Tier 1 process because employers often needed extensions granted for return ofdocumentation, or theyunintentionally submittedincomplete documentation.The wage calculations alsoadded a great deal of time tothe process. Wagecomplexity is variabledepending on the wage type.Each wage calculationpassed through two levels ofQuality Assurance Review(QAR) before the auditproceeded to Reporting andFinalization.PlanningField Work Employer Selection Claim Selection Initial Letter Document Review Wage CalculationReporting andFinalization Preliminary Report Audit Walkthrough Final ReportQuality Assurance ReviewReporting and Finalization isthe third and last phase of a Tier 1 audit. During this phase the auditor prepares the preliminaryreport, then sends it through QAR before it is delivered. The auditor schedules and conducts awalkthrough with the employer and their TPA.The best part – the walkthrough! The audit walkthrough, typically conducted by conference call,is for the purpose of ensuring the employer and TPA understand the preliminary report andaudit findings. Customer feedback suggests it was the most beneficial part of the audit processbecause rich discussions were happening between the employers and their TPAs regarding waysthey could improve their partnership to ensure injured workers’ wages are calculated correctly.This was a key component to our education before sanction strategy. After the walkthrough acustomer satisfaction survey was sent to all the participants.
Tier 1 Audit Pilot: A Comprehensive ReportIf wages were determined to be under‐calculated, the employer was required to correct thewage and benefit rate within 14 days. Some injured workers’ received payment of underpaidbenefits due to the Tier 1 Audit. Other workers were overpaid. If a worker was found to beoverpaid, the employer was made aware and then could decide whether to pursue anoverpayment assessment or not.Customer Feedback and Survey ResultsEmployers and third party administrators were appreciative of the instruction and willing tocorrect any under‐calculations found during the audit. Collaboration occurred between theemployer, TPA and Program Compliance staff. This was reflected in the customer satisfactionsurveys.Employers and TPAs were able to focus on the educational benefits of Tier 1 resulting from theinstruction and the customer support provided throughout the process.During the post‐audit walk through, would you say your auditoraddressed specific issues identified in the audit report?2% 1%1%7%Strongly agreeAgreeNeutral37%53%DisagreeStrongly disagreeNot applicable“Our auditor was very receptive to hearing our response to the audit andlistened to our opinions. She worked with us and took back questions andresponded to our needs immediately.” Anonymous7
Tier 1 Audit Pilot: A Comprehensive Report8The Audit ResultsPassing a Tier 1 AuditThe Tier 1 Audit Pilot isdesigned for active self‐insured employers. Employerswho are new to self‐insurancewere excluded from the auditpilot since the scope of Tier 1is limited to wages and anewly certified employerwould benefit from a broaderaudit consultation. Likewise, ifan employer became inactivethey were excluded from theaudit pilot.2015‐2016 Tier 1 Audit Pilot SummaryOverall Results of 358 Self‐Insured Employers020406080 100 120 140 160 180PASSED TIER 1 THRESHOLD162DID NOT MEET TIER 1 THRESHOLDNOT REVIEWED (NEW OR INACTIVE)13561The threshold for passing Tier 1 is 70% accuracy (i.e., 7 of 10 claims within variance) or The Spiritof 70. Claims within 5% of the auditor’s wage calculation were considered within variance. If theemployer over‐calculated wages the claim was considered within variance as well, since an over‐calculation would not adversely affect the worker.Out of 297 employers audited, the 162 employers who passed the Tier 1 threshold will notrequire another performance‐based audit until the next audit cycle. The 135 employers that didnot meet the threshold will undergo a Tier 2 Audit.
Tier 1 Audit Pilot: A Comprehensive ReportAudit FindingsClaims affected by Methodologyvs. Calculation ErrorsMethodology errors significantly outnumberedcalculation errors due to the complexity ofdetermining the monthly wage. Method Error: An error in the applicationof rules, policies, or guidelines.Calculation Error: A mathematical error ortransposition.The SIF‐5A is a spreadsheet Self‐Insurers arerequired to use when submitting wage calculationsto L&I. The department attributes the low matherrors to use of the new SIF‐5A.Table 1 (below) displays the detailed ranking of allaudit findings.1400120010008006004002000Claims with Calculation ErrorsClaims with Methodology ErrorsTable 1: Tier 1 Audit Findings RankedRank12345678910111213141415ErrorMultiple Rates of PayEmployers Health Care ContributionRepresentative PeriodOther CompensationBonusesHourly Rate at Date of InjuryOvertime HoursRegularly ScheduledCalculation ErrorsAverage Hours Per MonthSalariedAveraging WagesOther EmploymentAverage Hours per DayNon‐Standard WageLike Employees9Errors Found581524463378377189184158108107816026191914
Tier 1 Audit Pilot: A Comprehensive Report10The majority of audit findings are due to 5 common methodology errors.1) Multiple Rates of Pay: Including allhourly rates (i.e., shift differential,weekend premiums, working out‐of‐class).2) Employers Health Care Contribution:Including employer paid contributionand correct amount for medical, dentaland vision.3) Representative Period: Establishing aperiod that fairly represents theworker’s wage on the date of injury(i.e., 3 months prior to the injury).4) Other Compensation: Including lumpsum payments that do not meet thedefinition of a “bonus” but still qualifyas part of the worker’s wage per RCW.5) Bonuses: Including all bonuses (i.e.,income based on work performance)paid in the 12 months preceding theinjury.Figure 1: Comparison of Tier 1 Audit Findings581524463378377189 184158108107816026 19 19 14
11Tier 1 Audit Pilot: A Comprehensive ReportKey Grouping of Methodology ErrorsReviewing the employment pattern is a key step in determining how to report and calculate thegross monthly wage. Seven of the methodology errors in Table 1 can be grouped together asemployment pattern errors.Table 2: Audit Findings GroupedRank1Methodology ErrorEmployment Pattern:Errors Found1025Multiple Rates of PayRegularly ScheduledAverage Hours Per MonthSalariedAveraging WagesAverage Hours per DayNon‐Standard rs Health Care ContributionsRepresentative PeriodOther CompensationBonusesHourly Rate at Date of InjuryOvertime HoursOther EmploymentLike 2%6%6%1% 1%100%Employment Pattern Scenarios:Scenario 1: The Wages were calculatedusing Average Hours Per Month whenthe injured worker has an hourly shiftdifferential. Wages should becalculated using multiple rates (i.e.,regular hourly rate and shift differentialrate). The methodology error isMultiple Rates of Pay.Scenario 2: The wages were calculatedusing Multiple Rates of Pay when aninjured worker has one hourly rate plusovertime. Per RCW the worker’s wageshould be calculated using a standardformula. In this scenario themethodology error Is ourly Rate atDate of ees yersHealth CareContributions16%Figure 2: Audit Findings Grouped
12Tier 1 Audit Pilot: A Comprehensive ReportAudit OutcomesDuring the Tier 1 Pilot, a total of 1752 claims were reviewed, of which 1127 were within variance(Figure 3). This indicates that the claim accuracy rate of 64% is higher than the employerpassing rate of 54% (Figure 4).Figure 3: Claims within 5% Audit VarianceFigure 4: Employer Pass/Fail RateClaimsOutsideVariance36%Did NotPass Tier145%ClaimsWithinVariance,64%PassedTier 155%The Tier 1 Pilot started with an audit selection goal of 35 claims per employer. Using ajudgmental sample i.e., always with higher complexity of wage calculations. Because theselection of claims was often smaller than 35, and the experience showed that a smallersampling had similar findings, the audit selection was changed to a goal of 10 claims peremployer. However, many employers still had less than 10 audit eligible claims. This resulted ina range of claim selections per employer.An employer with lessthan 3 eligible claimsmust have 100%accuracy to pass (i.e.,if 1 of 2 claims wereout of variance theywould not achieve70% accuracy).120114100Self‐Insured EmployersFigure 5 shows that114 self‐insuredemployers had lessthan 3 audit eligibleclaims.8057604240302120501‐2 ClaimsReviewed3‐5 ClaimsReviewed6‐9 ClaimsReviewedFigure 5: Claims Reviewed per Employer10 ClaimsReviewed11‐34 ClaimsReviewed35 ClaimsReviewed
Tier 1 Audit Pilot: A Comprehensive ReportFigure 6 shows how many wage determinations were found to be under‐calculated, over‐calculated and how many calculations matched the auditors (to the penny). Of the 899 claimsthat were under‐calculated 625 were below the 5% variance.If the wage was under‐calculated, the employer was required to correct the wage calculationand pay any additional benefits owed. The auditor issued wage orders on all under‐calculatedclaims.If a claim was over‐calculated the employer had the choice of requesting a wage order and/orpursuing an overpayment from the injured worker.100%80%60%40%CalculationsCorrect231Wages Over‐Calculated573Wages Under‐Calculated89920%0%Figure 6: Wage Calculation Comparison ResultsWhile the focus of Tier 1 was on wage calculation, and not rate of compensation, we didbecome aware of instances during walk‐thru’s where the wage calculation did not affect thebenefit rate of the injured worker. For example, if an injured worker was paid at the maximumtime‐loss rate due to high wages, a correction that increased the wage calculation to a higherwage would not change the benefit amount.13
Tier 1 Audit Pilot: A Comprehensive Report14Customer Feedback and Survey ResultsA valuable part of the audit resultswere the corrections made to under‐calculated wages, and in some cases,adjustment payments issued toinjured workers.As measured by the CustomerSatisfaction Survey Results (Figure 7)approximately 90% of employers andTPAs agreed or strongly agreed thatthe walkthrough providedinformation needed to complete therequired actions on the PreliminaryAudit Report.The survey also allows for free text.Below is a quote from a self‐insuredemployer who had a positiveoutcome from the Tier 1 Audit Pilot.Did the post‐audit walk‐through provide theinformation you needed to complete the %Other4%Strongly agree47%Disagree3%Figure 7: Customer Satisfaction Survey Results“The narrow scope, on one specific issue, was efficient, allowed us to focusintently and learn what we were missing so we could make specificimprovements to our program. [The Auditor] was AMAZING & was focusedon HELPING us succeed by discovering our deficiencies and using them asopportunities to help us improve! Although it's hard to hear when you'vemade a mistake and these audits are extremely serious, this didn't feelpunitive at all!! [The Auditor’s] positive attitude and desire to work with us(not against us) was the catalyst that truly made a team in this. Workingtogether was not only a lot of fun but a wonderful experience. The walk‐through was fantastic!! It was extremely detailed & collaborative,everyone's voices were heard and great ideas were implemented. Wesincerely appreciate the time allocated for [The Auditor] to meet with us inperson!! The face‐to‐face meetings alone, were the single most valuableaspect in this process. It was really nice having our own personal tutor!!Believe it or not, I am actually looking forward to future audits!! I know ourprogram isn't perfect but I am 100% confident that this audit formatfacilitates allows L&I to help me get there, which ultimately benefits themost important customer in the process; the injured worker!” TerriNienkirk Workers Compensation Program Manager Seattle Children’s.
Tier 1 Audit Pilot: A Comprehensive ReportLessons LearnedLessons learned are experiences, both positive and negative, from a project t
final audit report was due within 90 days. Since the old audit process was performed onsite, this was a new process for both the audit team and the employers. Once the process becomes familiar the time‐cycle is expected to shorten. An aim of
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