While self-funded benefit plans can allow an employer to save significantly on employee health care benefit costs, there are many risks involved with managing these plans that can cause financial strain. Cost containment continues to be a priority for self-funded health plans, and organizations are constantly looking for ways to protect plan assets so funds aren’t lost due to improperly paid claims. 

Performing medical claim audits is a key strategy to determine if your self-funded plan is operating effectively and to help prevent financial exposure. These audits also help executives fulfill their fiduciary responsibility relating to management of the employers benefit plan. Conducting provider billing reviews can be an especially beneficial method to uncover payment errors and can potentially save employers money. Issues can arise within medical benefit plans frequently, yet it’s common for organizations to only perform a claim audit or billing review once every three years.

Self-Funded Benefit Plan Overview

Self-funding is an insurance arrangement in which an employer assumes the financial risk for providing health care benefits to its employees. Over the last 10 years, self-funding has been increasing in popularity as employers look for means to bend the cost curve.

In a self-insured arrangement, employers pay claims out-of-pocket as they’re incurred instead of paying a premium to an insurance carrier. Employers typically engage the services of a third-party administrator (TPA) to manage the benefit claims process.

Risks

Employers who are self-insured bear complete financial risk. While outsourcing claims to a TPA is prudent, employers should provide some level of TPA oversight to help reduce the presence of errors in the claims process, which often yields error rates of 2%—6%. TPAs are often more focused on regulatory and compliance issues rather than maintaining financial accountability and correcting any potential errors that arise in claims processing.

Suspect Performance Reporting

In contracting with a TPA, employers typically draft agreed performance standards to guarantee a certain level of quality and provide some protection for subpar performance. However, reviews conducted to determine if criteria are met are typically self-reported by the TPA so objectivity and the reliability of results may be suspect.

For example, a TPA may self-report a key performance metric coming in at 100%, when in reality the actual performance measurement may be closer to 96% when calculated by an independent party. Even that small percentage margin can result in the loss of hundreds of thousands of dollars for an employer.

While employers may have performance guarantee language in place, there’s often minimal consequence to the TPA for not meeting the stated criteria. 

Rushed Payments

TPAs have prompt payment requirements that typically require an employer to pay a claim within 21 to 30 days of receipt. Often, employers hurry to pay bills in the short allotted time frame without designating time for a thorough claim review. The quicker an employer moves to pay a bill, the more likely there will be mistakes.

This can leave the door open to improper charges being paid because billing wasn’t properly examined. When an employer does review a claim, they’re often paying the claim based on face value, or the total sum, without looking into separate itemizations of the bill.

Line Item Report Errors

A line item report is a bill provided to a plan member by a hospital or physician that breaks down all care services item by item. When compiled together, these items compose the total master bill. Service items on a report can be as simple as medicine administered or more complex, such as procedures like MRIs, blood transfusions, or rates for staying in an intensive care unit or other designated facility.

Inaccurate or incorrect items are often erroneously added to a line item report by simple human error. Common errors frequently found in a line item report include the following:

• Duplication of services or items
• Incorrect billing of materials
• Incorrect current procedural terminology (CPT) codes
• Services that weren’t even performed
• Unjustified charges

Many care providers don’t require itemized billing, so it’s important that full details are requested in order to determine their accuracy.

Provider Billing Reviews

As noted, employers are likely to pay a bill without a review. Performing a thorough provider billing review can identify individual items that were incorrectly added to the bill. Provider billing reviews can determine the following:

• Medical necessity of services
• Duplicate billing of items or services
• Proper industry standards of coverage applied

Review Process

In order to determine if a claim accurately reflects the provided care, the provider billing is compared to a member’s medical records with reviews performed at administrative offices. Documents that can be reviewed include:

• Claims associated with the member
• Medical guidelines
• Medical records to verify services rendered
• Treatment of care standards

Examples

Below are two examples of potential situations in which inaccurate reporting or billings could be discovered.

Newborn Intensive Care Unit (NICU)

While uncovered line item report errors can be as simple as accidentally marking two doses of a medication administered rather than one, errors can often be observed in more egregious scenarios.

For example, consider a mother who gave birth to a premature baby who was admitted to an NICU for observation. It’s likely the mother would need stabilization before being discharged herself and the baby would remain in the NICU for a longer period of time.

A hospital, however, may bundle billing for both the mother and infant care without providing itemization, which could provide room for error. Upon reviewing line items, it could be discovered that items related to the infant’s care could include services that wouldn’t even be applicable to a newborn.

Self-Funded Hospital System

A self-funded hospital system experiencing an increase in claims cost from year to year may not be able to determine the cause of rising costs if its enrollment rate remained flat with no change in employee medical utilizations.

The system’s TPA likely would have reported claims processing performance at 100% the prior year for both financial and payment accuracy—essentially asserting there weren’t any claims errors during that time period.

To evaluate the TPA’s claims payment performance and adherence to the client’s medical plan and benefit provisions, our professionals would review a statistically valid, stratified random sample of about 200 medical claims.

The result of the claims audit could demonstrate that the TPA performed below the rates reported, and below the service level agreement established in the TPA’s contract. The TPA’s financial accuracy may land at around 96.8%, with a payment accuracy of 96.1%, lower scores than the 100% self-reported rate and below the designated service level agreement standards of 98% for both financial and payment accuracy.

These findings could result in hundreds of thousands of dollars in payment errors for which the system may recover a significant portion of overpayments.

We’re Here to Help

Self-funding provides companies with the opportunity for significant savings. However, companies should be actively engaged in the management of their plan and oversee that their TPA is operating effectively. Standard HR staff often don’t have the required knowledge to manage medical benefits so having a trusted advisor who can support TPA oversight can help the process operate more efficiently.

To learn more about how your business can conduct audits or billing review processes as well as other methods to save money for self-funded health plans, watch our recent webcast or contact your Moss Adams professional.