Pennsylvania Auditor General Jack Wagner Finds Poor Management of State Workers' Insurance Fund Contracts, Costing Taxpayers

Says mismanaged workers' compensation insurance program needs better oversight

HARRISBURG, Pa., Feb. 1, 2012 /PRNewswire-USNewswire/ -- Auditor General Jack Wagner said today that the State Workers' Insurance Fund, the largest workers' compensation insurance carrier in Pennsylvania, paid nearly $4.9 million over a two-year period to a Pennsylvania-based claims services and medical management company to help manage operations and save money, but SWIF failed to hold the contractor accountable to terms of the contract and many of the expected outcomes were not achieved. 

SWIF operates within and falls directly under the Department of Labor and Industry, whose secretary serves as SWIF's chair.

Wagner said that a special performance audit, released yesterday, showed that of the $4.9 million that SWIF paid to MedRisk, more than $2.5 million went to the contractor for performing certain services that SWIF's employees performed themselves.

The audit, which is available to the public at www.auditorgen.state.pa.us, also noted that SWIF spent at least $73.7 million for its PowerComp automated system, a system plagued by problems and initially projected to cost $10.6 million. Poor contract management and weak oversight suggest that SWIF may be incapable of managing PowerComp's planned replacement, Wagner said

"It is absolutely critical that government agencies utilize taxpayer money in a wise and prudent manner," Wagner said. "The Department of Labor and Industry must tighten up its oversight of SWIF, and SWIF must better manage its contracted services to ensure that Pennsylvania taxpayers and businesses are protected and SWIF is operating efficiently and effectively."

The State Workers' Insurance Fund was established in 1915 by the Pennsylvania Workers' Compensation Act. It operates as an enterprise fund, which provides services to the public for fees that make the entity self-supporting. SWIF had 323 employees as of December 2011.

The purpose of the fund is to provide a guaranteed workers' compensation insurance option to Pennsylvania businesses because the Workers' Compensation Act mandates that every employer must carry workers' compensation insurance.  Businesses may acquire workers' compensation insurance through private insurance carriers, but these private insurers may elect to deny certain applicants.  For this reason, SWIF is sometimes referred to as the insurer of last resort.

Wagner's report included eight findings and provided 17 recommendations to improve the operations of the State Workers' Insurance Fund, including:

• If SWIF continues outsourcing to MedRisk, SWIF should issue a new Request for Proposals to more accurately reflect the actual work to be performed.
• SWIF should comply with state procurement guidelines to implement contract amendments and change orders when modifying pertinent contract terms and conditions.
• SWIF should analyze cost versus benefits regarding medical bill review and repricing services.
• SWIF should not allow MedRisk to review and re-price its own in-network bills; otherwise, SWIF must ensure that MedRisk applies proper discounts and does not delay bill processing.
• SWIF should learn from its mistakes in implementing the PowerComp automated system and avoid mistakes in future projects by taking steps such as designating a project manager and ensuring adequate legal review of contracts.

Wagner's auditors also noted numerous procurement deficiencies made by SWIF and L&I, and that contract provisions were eased so much that the procurement process was unfair to other vendors who might have bid lower and ultimately performed better.

Due to a limited amount of information provided to his department concerning the procurement and selection process of the MedRisk contract, Wagner said that his auditors were unable to conclude on whether the MedRisk vendor was selected appropriately. 

Wagner said that SWIF created a conflict of interest and the potential for fraud by allowing MedRisk to process its own in-network bills and by failing to ensure that MedRisk does not intentionally delay the processing of those bills.  Consequently, the Department of the Auditor General will provide a copy of the audit report to the Office of the Attorney General for further evaluation.

The audit further noted that the Department of the Auditor General previously investigated SWIF for rejecting vendor proposals prior to contracting with MedRisk. In an April 2008 special investigation report, Wagner's office was critical of SWIF for not properly documenting why it rejected all proposals that resulted from its first three requests for services it was seeking.  A request for proposals was first issued in 2004, and two others were issued and rejected in 2005; it was not until July 21, 2006, that a vendor was selected and MedRisk was the chosen vendor.  The audit noted that according to SWIF's former director, the evaluation committee exercised its option to reject all the proposals submitted because the committee believed that the proposals were lacking in quality and were thin on details.

"With a $4.9 million investment in MedRisk through December 2010, the State Workers' Insurance Fund should assure policyholders and claimants that outsourcing services is necessary," Wagner said.

Auditor General Jack Wagner is responsible for ensuring that all state money is spent legally and properly.  He is the commonwealth's elected independent fiscal watchdog, conducting financial audits, performance audits and special investigations.  The Department of the Auditor General conducts thousands of audits each year.  To learn more about the Department of the Auditor General, taxpayers are encouraged to visit the department's website at www.auditorgen.state.pa.us.

Contact: Steve Halvonik 717 787-1381

SOURCE Pennsylvania Department of the Auditor General