City and Employee Funded Core InsuranceBUDGET AND PERFORMANCE IMPROVEMENT
Internal Audit Division INTERNAL AUDIT REPORT
TO:
VIA:
FROM:
DATE:
AUDIT:
PERIOD:
Jorge M. Gonzalez, City Manager
Kathie G. Brooks, Budget and Perforl)ilancelmprovement Director/
James J. Sutter, Internal Audita'?¥
November17,2010 ·
City and Employee Funded Core Insurance Audit
January 1, 2009-June 30, 2010
This report is the result of a regularly scheduled audit to review the amounts charged, collected and
paid by the City and employees in exchange for the health, dental and life insurance benefits
received between January 1, 2009 and June 30, 2010 since the inception of the City's self-insurance
plan for health and dental.
INTRODUCTION
Chapter 78, Article II, Sections 78 through 81 of the City Code provide for employee health care
coverage with the cost of such coverage shared between the employee and the City. In addition,
the collective bargaining agreements of the American Federation of State, County and Municipal
Employees (AFSCME), the Communication Workers of America (CWA), and the Government
Supervisors Association (GSA) all require the City to provide group health and dental coverage to
their members. Providing group health and dental coverage to employees helps enable the City to
attract and maintain a quality workforce.
Currently, the City provides its active full time employees and retirees the opportunity to purchase
group health (medical) and dental care coverage. Both the City and employee/retiree contribute to
the costs of this coverage, at different rates, based on the plan elected by the participant. These
group health plans exclude coverage for members of the Fraternal Order of Police (FOP) and the
International Association of Fire Fighters (IAFF), as both have their own health trusts and do not
participate in the City's group health insurance plans. Further more members of the IAFF do not
participate in the City's Dental plan as it is covered by their own Trust. Members of the FOP do
participate in the City's dental plan.
Retirees hired prior to March 18, 2006 share equally in the group health and dental cost with the City
paying 50% and the retiree paying 50% of the cost of coverage. However, due to the changes in the
City's pension system which became effective on March 18, 2006, those employees hired
afterwards will instead be provided with a $10 monthly stipend for each year of service toward their
group health and dental costs as retirees with a maximum of $250 per month ..
In June 2008, the City Commission passed Resolution No. 2008-26818 to implement self-insured
health and dental plans in accordance with Florida Statute Section 112.08, which means that the
City would assume both the plan's risk and its reward based on the number and amount of claims
received. A monthly administration fee is paid to the third party plan administrator (currently
Humana Medical Plan of Florida, Inc. for health and Metropolitan Life Insurance Company for
dental) providing the City with a provider network, claims adjudication and plan administration. The
City is provided access to employee claim information (without any identifying employee information)
to help customize plan benefit design and health and wellness events.
We ore commifleclto providing excellent public service one! solely to oil who live, work, one! ploy in our vibront, lropicol, historic community.
Internal Audit Report
City and Employee Funded Core Insurance Audit
November 17, 2010
In addition, the incurred claims information can be utilized by the City's benefits consultant to make
the annual actuarial determination of plan premium costs. Excess premium amounts are retained by
the City and are used to build the plan's reserves which can be used when conversely incurred
claims exceed the premiums paid.
Finally, the City selected Hartford Life and Accident Insurance Company based on their response to
Request for Proposal No. 10-2589 to provide a basic group life and accidental death and
dismemberment insurance plan for the City's non-public safety employees and retirees, and an
employee funded (voluntary) supplement life insurance plan for all employees. Basic life and
accidental death and dismemberment insurance provides each full time non-public safety employee
life insurance coverage equal to their annual salary, rounded to the next highest thousand dollars,
and one time their annual salary to a maximum benefit of $20,000 in accidental death and
dismemberment coverage. The cost of basic life and accidental death and dismemberment
insurance is shared between the City and the employee with each paying 50% of the coverage.
OVERALL OPINION
The City's implementation of self-insured health and dental plans appears to have been effective as
cost savings have been realized with no noticeable material changes in benefits. Human Resources
Department and/or Finance Department staffs conduct monthly medical audits to ensure that
insurance deductions and benefits match, that tested employees' payroll deductions equal approved
amounts, that timely wire transfers are made to the plan administrators and that the medical and
dental plans funds are self-supportive. Despite these positive findings, the following shortcomings
were noted during testing that are in need of improvement:
• The City's current fiscal year dental insurance claims have exceeded contributions by
$93,018 through June 30, 2010 as monies are transferred from the medical insurance fund
to help cover this shortage. Overall, the combined medical and dental self-insured plan
funds' total operating income equals $2,304,536 as of July 30, 2010.
• Basic life insurance transactions are commingled in the City's Financial System thereby
hindering subsequent analyses performed by the Human Resources Department.
• Dental plan audits were not performed timely by Human Resources Department personnel
during the audit period thereby increasing the possibility that unwarranted differences would
continue to exist.
Departmental policies and procedures covering health, dental and life insurance processes
do not entirely reflect current operations and are in need of revision.
PURPOSE
The purpose of this audit was to determine whether active employee and retiree insurance
premiums, and City contributions and payments were properly authorized, correctly collected,
accurately recorded, and timely reconciled; whether tested operations were performed in
compliance with the City Code and City Resolutions; and whether the third party administrators
conformed to the tested terms and conditions of their signed agreements.
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Internal Audit Report
City and Employee Funded Core Insurance Audit
November 17, 2010
OBJECTIVES
1. Confirm that comprehensive policies and procedures exist, are known and are followed by
staff.
2. Confirm that tested documentation is complete, well organized and sufficient, and that
internal controls (segregation of duties, timely reconcilement of payroll deductions and City
contributions with insurance company invoices, etc.) are adequate.
3. Confirm that tested employee and retiree insurance rates and allocations are in agreement
with the relevant sections of the City Code and Resolutions.
4. Confirm that tested employee and retiree payroll deductions were correctly calculated based
on the chosen coverage.
5. Confirm that tested City payments to the designated third party administrators are submitted
timely.
6. Confirm that tested health, life and dental transactions are recorded accurately in the City's
Financial System.
7. Confirm that selected key terms in the City's agreements with the designated third party
administrators are complied with.
FINDINGS, RECOMMENDATIONS AND MANAGEMENT RESPONSES
1. Finding: Medical and Dental Insurance's Combined Operating Revenues Cumulatively
Exceed Operating Expenses but Current Year Dental Insurance Premiums are Insufficient
As of June 30, 2010, the Human Resources Department provided documentation stating
that there were 1 ,050 active employees and 566 retirees participating in the City's group
health insurance plans. The following figures were calculated based on entries into the
City's Financial System as they separately show the operating income (loss) for medical and
dental insurance since the inception of the City's self-insured plan on January 1, 2009
through June 30, 2010:
MEDICAL INSURANCE 01/01/09-09/30/09 10/01/09-06/30/10 Total
(9 months) (9 months)
Retiree Drug Subsidy $143,415 $0 $143,415
Employee Contributions $5,386,660 $5,008,543 $10,395,203
City Contributions $7,269,787 $6,513,735 $13,783,521
Recoveries $65,319 $460,918 $526,237
Total Operating Revenues $12,865,181 $11,983,196 $24,848,376
Personnel Services $66,194 $41,963 $108,157
Administrative Fees $572,029 $436,327 $1,008,356
Bank Fees $11,859 $13,284 $25,143
Stop Loss Excess ·• $469,982 $465,460 $935,442
Ca~itation Fees ·'* $113,712 $119,339 $233,052
Prescription Claims $2,515,462 $2,313,962 $4,829,423
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Internal Audit Report
City and Employee Funded Core Insurance Audit
November 17, 2010
*
Paid Claims -Eye $0 $48,229 $48,229
Paid Claims-Medical-Hum ana $6,978,292 $8,311,871 $15,290,162
Total Operatinq Expenses $10,727,529 $11,750,434 $22,477,963
Total Operating Income (Loss) $2,137,652 $232,762 $2,370,414
The amounts in the stop loss excess row represent the reinsurance premiums that the City pays to a
carrier to cover any employees' cost of care that exceeds a set annual amount as a means to help
protect the plan's funding.
Capitation Fees is a payment method for health care services in which the physician, hospital or other
health care provider is paid a contracted rate for each member assigned, regardless of the number or
nature of services provided.
DENTAL INSURANCE 01/01/09-09/30/09 10/01/09-06/30/10 Total
(9 months) (9 months)
Employee Contributions $303,119 $303,898 $607,017
City Contributions $281 '135 $297,849 $578,984
Total Operating Revenues $584,253 $601,747 $1 '186,001
Personnel Services $24,396 $15,185 $39,581
Administrative Fees $27,800 $28,882 $56,682
Bank Fees $3,465 $2,254 $5,719
Fully Insured -HMO $200,088 $139,000 $339,088
Paid Claims-Dental $301,365 $509,444 $810,809
Total Operating Expenses $557,114 $694,765 $1,251,879
Total Operating Income (Loss) $27,139 ($93,018) ($65,878)
As shown above, the City's total combined medical and dental operating income equaled
$2,304,536 ($2,370,414 minus $65,878) for the January 1, 2009 through June 30, 2010
audit period. The medical insurance's operating income balance allows monies to be
transferred to help offset the dental insurance's current $93,018 shortage as the insurance
premiums are set in advance and are not subject to change until the covered fiscal year
expires.
Recommendation( s ):
The City with the assistance of hired actuaries should continue to closely scrutinize the
medical and dental annual operating income (loss) to ensure that the optimal amount of
contributions are collected to offset any payouts and to increase the funds to desired levels.
Management Response:
The Human Resources Department was aware of the underfunding of the PPO dental plan.
This underfunding was a result of a move to a new carrier providing enhanced benefits and
an elimination of one dental plan effective January 1, 2010. As a result of the change in
carrier and loss of a plan, the number of employees electing PPO coverage significantly
increased. This increase in enrollment was significantly higher than the actuarial projection,
resulting in the underfunding of the plan. The City is currently working with the actuary to
determine an appropriate premium increase for the 2011 plan year which begins on January
1, 2011 to prevent underfunding the plan and to begin to build plan reserves.
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Internal Audit Report
City and Employee Funded Core Insurance Audit
November 17, 2010
2. Finding: Life Insurance Entries are Commingled in the City's Financial System Thereby
Hindering Subsequent Analyses
The City's Financial System currently uses six different medical and four different dental
general ledger accounts to report their corresponding transactions. However, there are only
the following two accounts to record similar life insurance transactions: 601-7000-229326
(employee, retiree and City subsidy for employees) and 540-1791-000355 (City subsidy for
retiree life). As a result, there are various entries commingled in these accounts making it
difficult for Human Resources Department staff to subsequently conduct desired analyses.
Recommendation( s)
The Finance Department and Human Resources Department personnel should meet to
discuss the optimum number of general ledger accounts for recording the processing and
billing of life insurance transactions and to still provide the needed information for analyses.
Management Response:
The Human Resources Department is working with the Finance Department to determine
the availability of additional general ledger accounts to address this issue.
3. Finding: Dental Insurance Benefit and Payroll Deduction Reconcilements are Not Done
Timely
With the cooperation of the Humana Medical Plan of Florida, Inc. (Humana), the Human
Resources Department routinely performs monthly audits of the City's medical insurance
premiums collected versus the coverage provided. Any found differences are subsequently
investigated until resolved.
However, similar audits were not conducted on the dental plan during 2009 as
CompBenefits, the City's group dental plan administrator at that time, would not provide the
City with the reporting necessary according to questioned Human Resources Department
staff. Therefore, any existing differences could not be identified until a spreadsheet was
provided at the beginning of 2010 showing all employees and retirees who were terminated
as a result of a discrepancy throughout 2009. Human Resources Department staff
investigated the nine found true differences and made the necessary corrections.
The City Commission's subsequent ratification of Resolution No. 2009-27137 approved an
agreement with Metropolitan Life Insurance Company (Metlife) to administer the City's
group dental plan for a three year period commencing on January 1, 2010. Despite being in
an auditable format, Human Resources Department staff did not perform an analysis of
employees' enrollment and their deductions until requested by Internal Audit in June 2010.
Once completed, forty-one discrepancies were found which were corrected by the City's
Human Resources Department. No other dental audits were performed by the department
to date.
Recommendation( s)
The City's Human Resources Department in conjunction with Metlife should routinely
perform dental audits with all found differences further investigated until resolved. These
dental audits are a valuable internal control to help ensure that City employees' dental
payroll deductions and benefits received are the same. Furthermore, they take on added
importance after the conclusion of the annual open enrollment period due to the high
number of insurance coverage changes and should be required to be done shortly
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Internal Audit Report
City and Employee Funded Core Insurance Audit
November 17, 2010
thereafter.
Management Response:
The Human Resources Department is currently working on internal audit policies for the
Metlife Dental Plan.
4. Finding: Departmental Policies and Procedures are in Need of Revision to Better Reflect
Current Operations
The Human Resources Department's policies and procedures have not been updated to
cover such recent material operational changes as the City's conversion to self-insurance
and are in need of revision.
· Recommendation(s):
The Human Resources Department's operating policies and procedures should be updated
to more descriptively outline operations. Policies and procedures serve both as a
benchmark to measure individuals' performance and as an instruction manual in the event
employees' change. Once completed, they should be distributed to all applicable personnel
so that they can be read, understood and followed.
Management Response:
The Human Resources Department is currently working on updating the operating policies
and procedures for all its group benefit plans.
EXIT CONFERENCE
An exit conference was held on October 25, 2010 in OBPI's Conference Room. Participants
included Human Resources Department Assistant Director Rafael Granado, Human Resources
Administrator I Sue Radig, Human Resources Specialist Frank Estevez, Internal Auditor James
Sutter and Senior Auditor Mark Coolidge. Audit findings and recommendations were discussed, as
were management responses, which are included herein. All were in agreement with the contents
of this audit report.
JJS:MC:mc
F:\obpi\$AUD\INTERNAL AUDIT FILES\DOC09-10\REPORTS-FINAL\HEALTH, DENTAL AND LIFE INSURANCE RPT.doc
(Audit performed by Mark Coolidge)
cc: Hilda Fernandez, Assistant City Manager
Ramiro lnguanzo, Human Resources Director
Rafael Granado, Assistant Human Resources Director
Patricia Walker, Chief Financial Officer
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