Audit Report

Workers’ Compensation Program

The objective of this audit was to determine whether the City and County of Denver’s self-insured workers’ compensation program model delivers services to employees cost effectively and efficiently. Additionally, we assessed whether the City properly funds its self-insured program and is reporting in compliance with Generally Accepted Accounting Principles.

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The 2017 Colorado Workers’ Compensation Act allows employees to claim workers’ compensation benefits for injuries and occupational diseases arising out of and during the employee’s employment. The City maintains a self-insured and self-administrated program to process and purchase excess insurance to cover costs greater than $2.5 million for an individual occurrence. In 2017, the Workers’ Compensation Unit of the City’s Risk Management Office processed 927 claims with incurred costs of approximately $6.8 million, according to infographics prepared by the Workers’ Compensation Unit. This reflects a continuing trend of reduced claims and cost of claims. Understanding the costs and process is an important facet to ensuring the program works effeciently.

In our second audit of the program, we identified issues with strategic planning and policies and procedures that should be updated to improve accounting presentation, the process and system controls environment as well as operational effectiveness and efficiency.
Program Costs Understated – Workers’ compensation salary continuation benefits are not charged to the Workers’ Compensation Internal Service Fund, which results in an understating of the total cost of workers’ compensation by approximately 10 percent. As a result, the internal service fund may not comply with financial accounting standards for an internal service fund. Additionally, the liability associated with salary continuation is not reported in the City’s annual comprehensive annual financial report.

No Formal Strategic Plan – Risk Management does not have a formal strategic planning approach to evaluate and compare different workers’ compensation organizational and operational models. A more comprehensive approach inclusive of total program costs and formal key performance indicator reporting could lead to more efficient and effective program management to potentially uncover new cost savings opportunities and provide more transparency to the City’s employees and the public.

Policies and Procedures Need Revision – The Workers’ Compensation Unit has not updated its internal policies to reflect current business practices. The audit also identified an ineffective supervisor report and check-logging controls and controls that should be upgraded, including formal contract monitoring and reviews of subcontractor control environments that provide outsourced operational and financial processes to the unit. The unit should also attempt to accept electronic fund transfers. Also, the unit should review the fund balance target policy and consider modifications.

Risk Management Information System Does Not Support Current Business Processes – STARS, used for reporting and tracking workers’ compensation claims, does not support current business processes effectively and efficiently. Limitations include the lack of ad hoc reporting for lost and restricted duty days, a lack of built-in data entry controls, allowing records to be deleted versus deactivated, and a lack of custom views and tools to work more effectively and efficiently.

1.1 Salary Continuation Accounting and Reporting – We recommend the Workers’ Compensation Unit, in conjunction with the Department of Finance, develop an accounting and funding approach that allows salary continuation payments related to workers’ compensation claims to be:

  • Accounted for in the Workers’ Compensation Internal Service Fund; and
  • Calculated and report the liability associated with salary continuation in the Workers’ Compensation Internal Service Fund.

Agency Response: Agree, Implementation Date – May 31, 2019

1.2 Use Payroll System for Indemnity Payments – Before the end of 2018, we recommend the Workers’ Compensation Unit, in conjunction with the Controller’s Office, review the process for indemnity payments to determine whether it would be more efficient and effective to use the payroll system instead of the accounts payable system.

Agency Response: Agree, Implementation Date – Complete

2.1 Formal Strategic Plan – We recommend the Risk Management Office and the Workers’ Compensation Unit develop a formal strategic plan to address how to best provide workers’ compensation insurance in the most effective manner, including cost and level of service provided to injured employees. This plan should be developed by mid-2019 and be used to drive any identified process and program changes prior to the next budget and insurance bidding process.

Agency Response: Agree, Implementation Date – April 30, 2019

2.2 Update Formal Strategic Plan – In addition, we recommend a process be implemented to update the strategic plan on a regular basis to adjust for any changes in the workers’ compensation requirements or needs.

Agency Response: Agree, Implementation Date – April 30, 2019

2.3 Self-Insurance Retention Evaluation – We recommend the Risk Management Office and the Workers’ Compensation Unit evaluate the self-insurance retention level at higher, lower, and split levels based on higher- and lower-risk pools in conjunction with broker analysis and bidding to market for a new insurer whenever these insurance items are sent to bid.

Agency Response: Agree, Implementation Date – July 1, 2019

2.4 Calculate and Report Total Program Cost – We recommend the Workers’ Compensation Unit annually calculate and report on the total cost of the program, including medical, indemnity, direct and indirect administrative costs, and complete salary continuation costs.

Agency Response: Agree, Implementation Date – May 31, 2019

2.5 Develop Standard Key Performance Indicators – We recommend the Workers’ Compensation Unit develop standard key performance indicators for total program cost, claims processing, claims costs, and customer service, to help evaluate the program periodically against other model alternatives. All cost data should include all costs to the program.

Agency Response: Agree, Implementation Date – June 30, 2019

2.6 Report Key Indicators – We recommend the Workers’ Compensation Unit report its key performance indicators in an annual report or publish certain key indicators regarding workers’ compensation cost and efficiency on either public- or City-facing websites, as soon as possible.

Agency Response: Agree, Implementation Date – December 31, 2019

3.1 Update Policy and Procedures Annually – We recommend the Workers’ Compensation Unit dedicate resources to update policies and procedures at least annually to reflect current business processes.

Agency Response: Agree, Implementation Date – September 30, 2019

3.2 Strengthen Check Handling Controls – To strengthen existing internal controls, we recommend the Workers’ Compensation Unit use a daily check log and update workers’ compensation policies and procedures to include this requirement and consider setting up an Enterprise Cashiering Solution online receipting function for subrogation and restitution payments.

Agency Response: Agree, Implementation Date – Complete

3.3 Supervisor Reports – To strengthen existing internal controls, we recommend the Workers’ Compensation Unit: • Continue its emphasis on training agency supervisors on their responsibilities to complete a timely supervisor report and develop a formal mechanism that measures noncompliance; and • Establish an automated reminder process for past due supervisor reports with escalation to higher levels of management as part of the implementation of a new reporting system.

Agency Response: Agree, Implementation Date – June 30, 2019

3.4 Contract Monitoring – To strengthen vendor contract monitoring, we recommend the Workers’ Compensation Unit strengthen its existing contract monitoring program for all vendors providing services supplementing workers’ compensation operational and financial processes by: • Identifying and assigning a designee(s) within the Workers’ Compensation Unit to manage the contract monitoring program; and • Developing procedures to identify and address noncompliance with contract terms by service.

Agency Response: Agree, Implementation Date – February 28, 2019

3.5 Service Organization Controls – To strengthen internal controls surrounding subcontracted operational and financial controls, we recommend the Workers’ Compensation Unit request that all organizations providing services that affect operational and financial processing perform a Service Organization Control 1, Type II, report covering the company’s system of controls over services provided to the City. In the absence of such a report, we recommend the Workers’ Compensation Unit develop a mechanism of formal controls to ensure that subcontracted operational and financial controls are adequate and reliable.

Agency Response: Agree, Implementation Date – February 28, 2019

3.6 Multiple Claims Review – We recommend that the Workers’ Compensation Unit add a formal process to the workers’ compensation policies and procedures to include regular management review of cases where injured workers have multiple claims, sometimes spanning many years, to ensure that treatment and costs are coded to the proper claim, subrogation efforts are proper, approved treatments are not exceeded, and salary continuation and indemnity payments are accounted for properly.

Agency Response: Agree, Implementation Date – September 30, 2019

3.7 Current Target Fund Policy – We recommend the Workers’ Compensation Unit in conjunction with the Cash, Risk, and Capital Funding Division consider revising its current target base fund policy for the Worker’s Compensation Internal Service Fund to:

  • Adopt the actuarily determined 80 percent confidence funding level;
  • Specify a minimum 70 percent confidence funding level; and
  • Incorporate the workers’ compensation claim reserve and fund reserve policy into the City’s financial and reserve policies.

Agency Response: Disagree

4.1 Risk Management Information System Controls and Functionality – To strengthen internal controls and increase efficiencies in the claims management process, we recommend the Workers’ Compensation Unit:

  • Ensure that data application controls such as required fields, drop-down selection menus, field edit controls, record deactivation capabilities, and system security and record edit reports be included in system requirements for the new risk management information system;
  • Update departmental policy and procedures defining data field use and what is expected for data entry, especially for data fields that will have more open-ended information requirements;
  • Improve controls and claims-processing efficiencies by including customizable screen views, flags for stipulations from previous claims, a three-point edit check for claim number, date of injury and body part injured match, and system enhancements to help adjusters better manage multiple claims for multiple injuries over multiple years;
  • Automate interfaces between all IT systems used to the extent possible; and
  • Develop additional manual compensating controls for all controls that cannot be implemented in the application.

Agency Response: Agree, Implementation Date – April 30, 2019

 

We have completed our audit of the Workers’ Compensation Program. The objective of the audit was to determine whether the City and County of Denver’s self-insured and selfadministered workers’ compensation program model delivers services to employees in a costeffective and efficient manner. Additionally, we assessed whether the City properly funds its selfinsured program and is reporting in compliance with Generally Accepted Accounting Principles.

As described in the attached report, our audit revealed that the Risk Management Office’s Workers’ Compensation Unit needs to account fully for related costs and liabilities in the Workers’ Compensation Internal Service Fund, formalize strategic plans, update policies and procedures for monitoring of contract and subcontractor controls, as well as update or create key performance indicators for financial and managerial reporting, and update its risk management information system software to include better automated controls for claims-processing effectiveness and efficiency.

Through stronger formalized policies and procedures as well as effective manual and automated system controls, the Workers’ Compensation Unit will be able to ensure more accurate and transparent reporting of financial accounts and performance for employees and the public. Our report lists several related recommendations.

This performance audit is authorized pursuant to the City and County of Denver Charter, Article V, Part 2, Section 1, General Powers and Duties of Auditor, and was conducted in accordance with generally accepted government auditing standards. Those 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.

We extend appreciation to Department of Finance personnel, especially Risk Management and the Workers’ Compensation Unit, who assisted and cooperated with us during the audit.

Follow-up report
A follow-up report is forthcoming.
Other related reports
None at this time.
In the news
None at this time

Audit Team: Jeremy Creamean, Rob Farol, Roberta Holbrook, Ronald F. Keller, Shannon Dale, Kevin Sear