Read 0802 Workers' Compensation text version

Office of the City Auditor

Workers' Compensation Report No. 0802

September 30, 2008 Management has implemented a control structure that is sufficient and will provide reasonable assurance of compliance or timely detection of noncompliance. However, we identified four areas for improvement.

CITY COUNCIL Mayor Mary Manross Council Betty Drake Wayne Ecton W.J. "Jim" Lane Robert Littlefield Ron McCullagh Tony Nelssen

Office of the City Auditor 7440 East First Avenue Scottsdale, AZ 85251

Phone 480-312-7756 FAX 480-312-2634 www.scottsdaleaz.gov Web

September 30, 2008 Honorable Mary Manross and Members of the Scottsdale City Council: This is a report on Workers' Compensation, Audit No. 0802. We would like to thank Risk Management, Payroll, and Human Resources staff. Their cooperation and assistance during the audit was invaluable. We would also like to take the opportunity to recognize praise that was relayed to us by the Industrial Commission of Arizona for the City's, in particular Erin Taylor's, administration of the City's workers' compensation program. The audit was conducted by Kyla Anderson and Joanna Munar under the direction of Assistant City Auditor Lisa Gurtler, CPA, CIA. If you need additional information or have any questions, please contact me at 480-312-7756. Respectfully submitted,

Brent Stockwell Acting City Auditor

Table of Contents EXECUTIVE SUMMARY ..................................................................................1 ACTION PLAN..................................................................................................2 BACKGROUND ................................................................................................3 Workers' Compensation................................................................................3 Transitional Duty ...........................................................................................6 OBJECTIVE, SCOPE, AND METHODOLOGY ................................................7 RESULTS .......................................................................................................10 The workers' compensation policy and procedures manual is not up to date with current information and should be expanded to include all duties involved in the process.................................................................. 11 City management altered administrative policy without updating City Code........................................................................................................ 12 Human Resources does not receive needed information for employees on workers' compensation leave and transitional duty timely or efficiently. ................................................................................................ 14 The workers' compensation medical bill review and indemnity payment tasks can be streamlined. ........................................................................ 15 APPENDIX A ­ Management Response ........................................................16

Workers' Compensation City Auditor Report No. 0802

EXECUTIVE SUMMARY An audit of workers' compensation was included on the Audit Plan for the Fourth Quarter Fiscal Year 2007/08. This report sets out the results of audit work undertaken to evaluate the internal controls, verify compliance with state law, City Code, City Administrative Regulation, and policy and procedures related to workers' compensation. Results of audit work conducted indicate that management has implemented a control structure that is sufficient and will provide reasonable assurance of compliance or timely detection of noncompliance. Generally, the workers' compensation process is adequately designed and effective. Moreover, we found no evidence of fraud in the workers' compensation process. We identified the following issues, which will improve upon the current process, that are discussed further in this report and included in the Action Plan: · The workers' compensation policy and procedures manual is not up to date with current information and should be expanded to include all duties involved in the process. Human Resources does not receive needed information for employees on workers' compensation leave and transitional duty timely or efficiently. The workers' compensation medical bill review and indemnity payment tasks can be streamlined.

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The following issue demonstrates noncompliance with City Code and should be remedied: · City management altered administrative policy without updating City Code.

Workers' Compensation City Auditor Report No. 0802

ACTION PLAN

No. 1 Management Response The workers' compensation policy and procedures manual is not up to date with current information and should be expanded to include all duties involved in the process. Management Response: Agree Proposed Resolution: The Workers' Compensation Specialist will update the policy and procedures manual to include all duties of the position. Responsible Party: Work Comp. Specialist Completed By: Erin Taylor/February 2009 2 City management altered administrative policy without updating City Code. Management Response: Agree Proposed Resolution: Necessary action will be taken by Human Resources to amend City Code to reflect current administrative policy. Additionally, as part of this effort Human Resources will conduct a review of the Human Resources section of City Code to determine if there are any other changes that need to be made. Responsible Party: Human Resources Completed By: Bernadette La Mazza in 6 to 12 months Human Resources does not receive needed information for employees on workers' compensation leave and transitional duty timely or efficiently. Management Response: Agree Proposed Resolution: Human Resources will work with Financial Services to investigate the opportunity of an automated reporting system or develop new reports that may provide the HR/Benefits Division with workers' compensation absence information in a more timely or efficient manner. Completed By: Ken Nemec in 4 to 6 months The workers' compensation medical bill review and indemnity payment tasks can be streamlined. Management Response: Agree Proposed Resolution: Risk Management will examine the medical bill review process and we will explore utilizing technology solutions to improve efficiencies in the process. Risk Management and Payroll will review the indemnity payment tasks, including exploring technology enhancements and will evaluate possible policy and procedural changes. Responsible Party: Risk Management/Payroll Completed By: Erin Taylor/Laura Fanning February 2009 Responsible Party: Human Resources

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Workers' Compensation City Auditor Report No. 0802

BACKGROUND Workers' Compensation Workers' compensation is a no-fault system that is mandated by the State of Arizona, and enforced by the Industrial Commission of Arizona (Commission). The City is subject to Title 23, Labor, Chapter 6, Workers' Compensation of Arizona Revised Statutes (ARS), which requires each employer in the state to provide no cost workers' compensation benefits to their employees 1 . Benefits include medical care, compensation (if required), job retraining (if required), and death benefits. Every employee that sustains an injury or occupational disease, or the dependents of any employee that is killed as part of employment, is eligible for workers' compensation. There are some exceptions where an employer would not be liable, all having to do with willful misconduct by the employee. Per ARS, every employee has accepted workers' compensation benefits unless they expressly reject the coverage in writing prior to an injurious event. Acceptance of workers' compensation benefits precludes an employee from suing their employer over an industrial accident, unless the accident was the result of willful misconduct by the employer. The City has chosen to self-insure workers' compensation benefits, legally allowed under ARS §23-961. Workers' compensation is administered within the Risk Management Division of the Financial Services Department. The workers' compensation program is managed by the Workers' Compensation Claims Specialist (Claims Specialist) with assistance from an Administrative Secretary. In the last two fiscal years, Risk Management received 462 claims for workers' compensation benefits and over 4,000 medical bills for payment totaling over $4 million. Annually, the Commission fixes a schedule of maximum fees that can be charged by medical care providers for workers' compensation cases. Because of this, and in an effort to reduce costs, the City has contracted with a third-party medical bill review service, CorVel Corporation. CorVel is a member of the Blue Cross/Blue Shield network which provides for discounted medical services below the Commission's fee schedule. CorVel staff reviews, discounts, and issues payment for all the City's workers' compensation medical bills. Pursuant to the terms of the contract (prior to July 1, 2008), CorVel's fee for service was based upon a percentage of money they save the City by the review process. In the last two fiscal years CorVel has saved the City over $2 million, and was paid greater than $500 thousand.

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Per ARS §23-901 "employee" means every person in the service of an employer but not including a person whose employment is both casual, and not in the usual course of the trade, business, or occupation of the employer.

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Workers' Compensation City Auditor Report No. 0802

Scottsdale City Code §14-85 requires that medical benefits be paid immediately after an accident. Indemnity payments, which are compensation for lost wages while on industrial leave, are to be made from the second day after an accident occurs. This is a greater benefit than state law mandates, which requires indemnity payments be made from the eighth day after an accident unless the injury extends past 14 days in which case payment will be made retroactive to the day of injury. Additionally, state law requires indemnity payments be made at 66 percent of the injured employee's average monthly wage up to a certain limit, e.g., $3,000 for 2008, while City policy allows for employees to receive full net pay while on industrial leave. Workers' compensation costs include tax payments made to the Commission. Quarterly, the City is required to pay four different taxes totaling 5 ½ percent of the equivalent of State Compensation Fund premiums. Premiums for the State Compensation Fund are based upon wage information and class codes. Total direct workers' compensation costs are detailed below for the past four fiscal years. There are no defined historical trends due to variables including the total and type of industrial accidents sustained.

Workers' Compensation Costs 04/05 Actuals 05/06 Actuals 06/07 Actuals Indemnity Medical Expense Insurance Premiums* Legal Services Miscellaneous** Sub Total Recoveries Total Workers' Compensation $273,110 657,704 75,858 18,266 215,391 $1,240,329 (39,891) $1,200,438 $289,507 824,082 121,487 5,447 168,441 $1,408,964 (175,813) $1,233,151 $249,311 1,018,863 115,466 4,875 331,022 $1,719,537 (134,965) $1,584,572

07/08 Actuals

as of 8/4/2008

$460,343 749,348 88,695 9,359 237,490 $1,545,235 (66,959) $1,478,276

* Tax payments to Industrial Commission of Arizona **Includes payments to CorVel for services rendered SOURCE: Auditor analysis of City of Scottsdale SmartStream reports and Risk Management Annual Report: Fiscal Year 2006-2007.

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Workers' Compensation City Auditor Report No. 0802

Information on workers' compensation accident frequency by department is detailed below. The Police and Fire Departments constitute the majority of workers' compensation claims, followed by Community Services and Municipal Services Departments. More detailed information on workers' compensation frequencies and costs can be found in the Risk Management Annual Report.

Accident Frequency by Department Citizen and Neighborhood Resources Community Services Economic Vitality Financial Services Fire Department General Government Human Resources Information Services Municipal Services Planning and Development Services Police Department Transportation Water Resources Total

Corporation. SOURCE: Auditor analysis of Risk Management Annual Report Fiscal Year 2006-2007. Actuals for 07/08 were provided by the Risk Management Director.

04/05 Actuals 1

05/06 Actuals 2

06/07 Actuals 0

07/08 Actuals 0

45 0 7 N/A* 5 1 1 16 2

38 0 8 58 4 0 1 20 3

41 0 8 57 8 0 2 22 3

42 0 2 50 8 1 2 16 3

91 0 12 181

94 2 14 244

74 0 2 217

84 0 8 216

*The City opened its Fire Department in July 2005.

Previously fire services were provided by Rural/Metro

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Workers' Compensation City Auditor Report No. 0802

Transitional Duty City Code §14-85 mandates that employees that are on industrial leave will return to work on transitional duty as soon as their physician allows. Per Administrative Regulation (AR) 370, Transitional Duty, the purpose of the transitional duty program is to have these employees "return to work in good health and in positions where they are productive." The Human Resources Department is responsible for the program and is to work cooperatively with the employee's supervisor to determine an appropriate transitional duty position. When an employee is working in a transitional duty assignment they will receive their full pay, and are no longer eligible for workers' compensation benefits. Transitional duty assignments will be for a maximum of 180 days. If an employee is unable to return to their original assignment after 180 days, then other options are considered, such as medical retirement or short-term disability.

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Workers' Compensation City Auditor Report No. 0802

OBJECTIVE, SCOPE, AND METHODOLOGY This audit of workers' compensation was included on the Audit Plan for the Fourth Quarter of Fiscal Year 2007/08 as presented to the Audit Committee on March 27, 2008. The objectives of the audit were proposed to: · · Evaluate the internal controls surrounding the workers' compensation and transitional duty processes. Verify compliance with state law, City Code, City Administrative Regulation, and policy and procedures related to workers' compensation and transitional duty.

While transitional duty was included in the original audit objectives it was determined to remove transitional duty from the objectives for the following reasons: · · Transitional duty is not specific to workers' compensation cases. Any employee may participate even if their injury or illness is not work related. Human Resources does not have a defined process necessary to establish criteria to conduct an audit, see page 14.

Pertaining to this report, evaluating internal controls and compliance of transitional duty for workers' compensation claims only would not be beneficial, and a review of the entire transitional duty program was outside the scope of this audit. However, as a result of audit work, an area of improvement within the transitional duty program was identified. We evaluated the objectives based on the two most recent fiscal years. To complete this work we: · · · · · · · · Obtained and reviewed applicable state statute, Scottsdale City Code, and City Administrative Regulations. Created and analyzed questionnaires for Risk Management staff in order to assess control environment. Developed a Control and Risk Assessment matrix depicting the risk of undetected noncompliant activity and identified control activities in place. Conducted testing on ten claim files and ten payments to CorVel to determine the effectiveness of identified control activities. Reviewed the workers' compensation policy and procedures manual. Reviewed an audit of the workers' compensation billing process performed by the previous Accounting and Tax Audit Director in 2007. Analyzed tax payments made to the Commission for accuracy and timeliness. Reviewed and analyzed accompanying records for: 40 workers' compensation claims and

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Workers' Compensation City Auditor Report No. 0802

o Appropriateness of acceptance/denial. o Adherence to external and internal regulation. o Indications of fraud. · Conducted interviews with the following individuals: o Claims Specialist o Risk Management Director o Staff in the Benefits and Client Services Divisions of the Human Resources Department o Staff in the Payroll Program of the Financial Services Department o Staff from the Commission o Staff from CorVel

The following conditions were noted during control testing and discussed with management, but were excluded from the body of the report due to immateriality: · The ten day accident reporting deadline to the Commission was not being met. Noncompliance with ARS §23-908.G is technically a misdemeanor, however, staff at the Commission reported they do not monitor when reports are received and would not enforce this requirement or pursue legal action unless there was a case of bad faith involved. Commission staff could not recall any instances of bad faith on the City's part. Some claims in the first part of the fiscal year were calculated using the incorrect average monthly wage maximum per ARS §23-1041.D.6. The Commission reviews all calculations of average monthly wage. Any inaccuracies are reported for correction. The Supervisors' Report of Accident was not being received in Risk Management within 24 hours (or following Monday) as required by AR 244, Risk Management and Safety Functions and Practices. The Risk Management Director indicated that the point of the 24 hour requirement is to insure that Risk Management is notified of an accident. In many cases an accident is reported immediately via telephone or e-mail and followed up later with the Report. Workers' Compensation Notification Posters were not posted, or not posted correctly in all areas visited (six out of ten areas tested were in compliance). The poster does not include a statement that the City has been authorized by the Commission to self-insure. While state law indicates that posters must be present, it is silent on the need to have posters in every work location. There is little risk by not indicating that the City is authorized to self-insure. Four of the five payments to CorVel reviewed for services rendered were not paid timely. Although payments were paid several months after they were billed, the City did not incur any interest or penalties.

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Workers' Compensation City Auditor Report No. 0802

Audit work was conducted in accordance with generally accepted government auditing standards as they relate to expanded scope auditing in a local government environment and as required by Article III, Scottsdale Revised Code, §2-117, et seq. Generally accepted government auditing standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Survey work took place in May and June 2008, and fieldwork was completed in July 2008, with Kyla Anderson and Joanna Munar conducting the work.

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Workers' Compensation City Auditor Report No. 0802

RESULTS Objective 1: Evaluate the internal controls surrounding the workers' compensation process. A sufficient control structure should exist to provide assurance of compliance with appropriate statutory regulations. To be considered sufficient, the following elements should be present: · Control Environment - management is aware of the need for a control system and communicates this need with an attitude and awareness that sets the tone for the organization. Risk Assessment - relevant risks that impact compliance are identified, evaluated, and used as the basis for determining how to manage risk. Control Activities - policies and procedures are developed and documented. Information and Communication - usable, relevant information is captured and exchanged in a form and timeframe that allows employees to effectively carry out their duties. Monitoring - periodic assessments of the control structure are undertaken to identify what is working and what needs to be improved or modified.

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Results of audit work conducted indicate that management has implemented a control structure that is sufficient and will provide reasonable assurance of compliance or timely detection of noncompliance. It is perceived by staff within the Risk Management Division that management places a high degree of importance on implementing and maintaining internal controls. Management and staff reported that there are open lines of communication and the Risk Management Director is involved with decisions that staff is tasked with making. Additionally, technical resources are made available to staff, and management reviews budget-to-actual comparisons monthly. Internal control could be further strengthened by cross-training staff to perform more functions currently performed by the Claims Specialist alone. This would decrease the chance of discontinuation of business in the event of the Claims Specialist's absence. Additionally, alternative utilization of staff may allow for increased outreach and education to City departments. Moreover, the City should exercise its right, under contract, to audit CorVel. Currently there is no verification that CorVel is performing in compliance with contract terms, most importantly to ensure medical bills are repriced correctly to amounts allowable by the Commission and the Blue Cross/Blue Shield network. The City Auditor's Office does not possess the technical skills necessary to complete such an audit; therefore, an organization that specializes in the field of medical claims should be contracted to do the work.

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Workers' Compensation City Auditor Report No. 0802

While the control structure surrounding the workers' compensation process was adequate there is one control activity that is not effective. The workers' compensation policy and procedures manual is not up to date with current information and should be expanded to include all duties involved in the process. Criteria: Good business practice suggests that policies and procedures be reviewed annually, at a minimum, and updated if required. Evidence of the review should be documented. The purpose of having a policy and procedures manual is to: a. Communicate management's expectations and requirements to which staff must conform. b. Allow for business continuity during staff absence.

established

Condition: There is no evidence that the policy and procedures manual has been reviewed annually by management or staff. The existing manual contains policies and procedures that are outdated. Policies are not thoroughly written to provide sufficient direction to assist in the achievement of established requirements and expectations. The policies and procedures for the following are not included in the manual: · Quarterly tax payments made to the Commission. · Current practice for interfacing with CorVel for bill payment services including payments for services rendered. Cause: Competing priorities in the Claims Specialist's workload. Effect: There is no evidence that management has set policy and agrees with established procedures. Also, a discontinuation of business may result in the event of the Claims Specialist's absence.

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Workers' Compensation City Auditor Report No. 0802

Objective 2: Verify compliance with state law, City Code, City Administrative Regulation, and policy and procedures related to workers' compensation.

Audit testing revealed that claims were generally being processed in accordance with state statute. Issues of noncompliance were deemed immaterial and were discussed with management. Additionally, we found no evidence of fraud in the workers' compensation process. Information obtained during audit testing found the following, which are described in detail below: · · · City Code is not being followed. City Administrative Regulation is not being followed. Procedures that are not efficient.

City management altered administrative policy without updating City Code. Criteria: AR 150, Preparation of Scottsdale Legislative Documents, §2 Policy states "An ordinance usually amends the City Code and is required for the following actions: repeal/amend other ordinances." Condition: Scottsdale Revised Code §14-85.b.3 states: When the employee is on industrial leave...the employee is paid the difference between normal base pay and the amount received in workers' compensation. The difference is paid from accrued medical leave or vacation credits, unless authorized by the City Manager or designee. In 2003, the City Manager amended the policy to remove the requirement that employees use medical or vacation leave. Hotline #115, issued May 23 2003, states: ...employees on workers compensation would not be required to apply for reimbursement of their medical and vacation leave. The city would make up the difference between their workers compensation benefits and their full base pay for up to a year, until they return to work in a regular or transitional position, or until they leave city employment - whichever comes first.

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Workers' Compensation City Auditor Report No. 0802

AR 343, Leave, states that employees on workers' compensation will receive their full net take home pay. However, the AR is silent on the source of the additional funds. Staff has been following the policy to not use employees' medical or vacation leave to make up the difference between workers' compensation indemnity payments and their normal pay since 2003. However, to date, City Code had not been amended to reflect this change. Cause: Failure to create an ordinance to amend the City Code as required by AR 150. Effect: Inconsistency between current policy and City Code. formal adoption of the policy by City Council. There has been no

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Workers' Compensation City Auditor Report No. 0802

Human Resources does not receive needed information for employees on workers' compensation leave and transitional duty timely or efficiently. Criteria: AR 370, Transitional Duty Program, §2.2 states that: All incidents involving a work related injury, illness or disease must be reported to the Risk Management Division and the Benefits Division of the Human Resources Department within 24 hours or, in the event it is a weekend, at the beginning of the following workday. Employees injured on the job, in which the injury results in work restrictions or no work status, as outlined by the treating physician, may not return to the workplace until a Medical Tracking/Work Status Report form is completed by his or her treating physician and provided to the Risk Management Division, the Benefits Division of the Human Resources Department and his/her immediate supervisor. Condition: Currently, there is no consistent notification procedure to alert Human Resources to an employee who has been injured in an industrial accident, or when the employee returns from no work or transitional duty status. Currently, notification to Human Resources staff of injuries is made through various means: the Claims Specialist, the injured employee, or the employee's supervisor. Cause: The requirements to have all incidents reported to Human Resources and to have employees provide a Medical Tracking/Work Status Report form are incorrectly placed in AR 370, Transitional Duty Program. Not all industrial accidents result in an employee being placed on transitional duty. No one is identified to report incidents. Failure of management to enforce the requirement to have employees provide a Medical Tracking/Work Status Report to Human Resources. Effect: The Human Resources Department is not made aware of all employee-related situations. This can effect: · · · The calculation of FMLA (Family Medical Leave Act) leave, done by the Benefits division. The coordination of transitional duty as Human Resources is the responsible department for the program. The coordination of staffing needs for departments whose staff is on industrial or transitional duty leave.

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Workers' Compensation City Auditor Report No. 0802

The workers' compensation medical bill review and indemnity payment tasks can be streamlined. Criteria: Good business practice suggests that work processes should be efficient, practical, and cost effective. Condition: a. The Claims Specialist reviews medical bills three times during the claims process: 1) when medical bills are received from providers, 2) to match to the medical bills payment statement from CorVel, and 3) to match to the statement for services rendered by CorVel. The Claims Specialist estimates that the amount of claims billed in error total less than $500 per year, and the process takes 12 to 24 hours per month to complete. An audit conducted by the former Accounting and Tax Audit Director in 2007 found that controls are adequate to ensure that disbursements made by CorVel are adequately supported, reviewed, and processed. b. Necessary workers' compensation information is communicated to the Payroll Program of Financial Services by use of an Excel spreadsheet. The spreadsheet is prepared solely by the Workers' Compensation Claims Specialist; therefore, Payroll is reliant upon one employee which can delay payroll processing. Cause: Management's acceptance of established practice. Effect: a. It does not appear that the benefit outweighs the cost to the City for this practice. b. When workers' compensation information is not presented to Payroll staff in a timely manner normal payroll processing is interrupted. Additionally, decisions made in regards to workers' compensation, in the event of the Claims Specialist's absence, may not be accurate.

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Workers' Compensation City Auditor Report No. 0802

APPENDIX A ­ MANAGEMENT RESPONSE

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