OV-AR-00-002 Audit of the Inspection Service Reporting of Cost -Avoidance Savings Under the Fraudulent

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September 29, 2000 KENNETH C. WEAVER CHIEF POSTAL INSPECTOR SUBJECT: Audit of the Inspection Service Reporting of Cost-Avoidance Savings Under the Fraudulent Workers’ Compensation Program (Report Number OV-AR-00-002) This report presents the results of our audit of the Inspection Service’s reporting of costavoidance savings under the Fraudulent Workers’ Compensation Program (Project Number 99CR002OV000). Our objective was to assess the effectiveness and accuracy of information reported to agencies external to the Inspection Service. We concluded that cost avoidance savings were generally accurate and supportable. We identified discrepancies, but the errors did not have a material affect on savings figures reported under the Inspection Service Fraudulent Workers’ Compensation Program. Management provided comments on the report and agreed with our recommendation to require the use of birth month and year to calculate cost-avoidance savings for long-term periodic roll cases. Management’s comments were responsive to the recommendation. Management's comments and our evaluation of these comments are included in the report. We appreciate the cooperation and courtesies provided by your staff during the audit. If you have any questions, please contact Cathleen Berrick, director, Oversight, or me at (703) 248-2300. Debra D. Pettitt Acting Assistant Inspector General for Oversight and Business Evaluations Attachment cc: James K. Belz John R. ...

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September 29, 2000 CKEHINENF EPTOH SCT. AWL IENASVPEERC TOR SUBJECT: Audit of the Inspection Service Reporting of Cost-Avoidance Savings Under the Fraudulent Workers Compensation Program (Report Number OV-AR-00-002) This report presents the results of our audit of the Inspection Services reporting of cost-avoidance savings under the Fraudulent Workers Compensation Program (Project Number 99CR002OV000). Our objective was to assess the effectiveness and accuracy of information reported to agencies external to the Inspection Service. We concluded that cost avoidance savings were generally accurate and supportable. We identified discrepancies, but the errors did not have a material affect on savings figures reported under the Inspection Service Fraudulent Workers Compensation Program. Management provided comments on the report and agreed with our recommendation to require the use of birth month and year to calculate cost-avoidance savings for long-term periodic roll cases. Managements comments were responsive to the recommendation. Management's comments and our evaluation of these comments are included in the report. We appreciate the cooperation and courtesies provided by your staff during the audit. If you have any questions, please contact Cathleen Berrick, director, Oversight, or me at (703) 248-2300. Debra D. Pettitt Acting Assistant Inspector General for Oversight and Business Evaluations Attachment ames K. Belzcc: J John R. Gunnels

Inspection Service Reporting of Cost-Avoidance Savings Under the Fraudulent Workers Compensation Program TABLE OF CONTENTS Executive Summary Part I Introduction Background Objective, Scope, and Methodology Part II Audit Results Cost-Avoidance Savings Calculations Recommendation Managements Comments Evaluation of Managements Comments Appendix A.Periodic Roll Cost-Avoidance Savings Methodologies Used by Federal Agencies Reviewed Appendix B.Ten Federal Agencies With Highest Workers Compensation Costs Appendix C.Comparison of Sample Cost-Avoidance Savings Calculations Under Inspection Service and Other FederalAgency Methodologies Reviewed Appendix D.Statistical Sampling and Projections for Review of Inspection Service Cost Savings from the WorkersCompensation Fraud Program Appendix E. Managements Comments OV-AR-00-002 i1 1 46 6 7 7 8 9 01 11 21 41

Inspection Service Reporting of Cost-Avoidance Savings Under the Fraudulent Workers Compensation Program Introduction Results in BriefOV-AR-00-002 EXECUTIVE SUMMARY This report presents the results of our review of the Postal Inspection Services reporting of cost-avoidance savings under the Fraudulent Workers Compensation Program (Project Number 99CR002OV000). Specifically, we evaluated the accuracy and supportability of cost-avoidance savings calculations; the adequacy of the Inspection Service methodology used to calculate cost-avoidance savings; and the purposes for which cost-avoidance savings figures are used. Our review disclosed that cost avoidance savings were generally accurate and supportable. We identified discrepancies, but the errors did not have a material affect on savings figures reported under the Inspection Service Fraudulent Workers Compensation Program. In addition, cost-avoidance savings figures were adequately documented and the methodology used to generate cost-avoidance savings for long-term periodic roll cases was reasonable. Finally, Inspection Service management primarily used cost-avoidance savings figures for internal purposes, such as evaluating individual and program performance. Although discrepancies in the calculation of cost-avoidance savings had an immaterial impact on claimed savings, discrepancies due to a variation in the application of the Inspection Service methodology occurred frequently throughout the projected audit universe. These discrepancies relate to the calculation of birth dates and benefit termination dates for long-term periodic roll cases. Specifically, when applying the methodology for long-term periodic roll cases, some inspectors applied both the month and year to the calculation when evaluating birth dates and benefit termination dates, while other inspectors applied only the year. Consistent application of the Inspection Service methodology would help ensure more accurate calculations of cost-avoidance savings to assist in the evaluation of individual and program performance. i

Inspection Service Reporting of Cost-Avoidance Savings Under the Fraudulent Workers Compensation Program Summary of Recommendation Managements Comments Overall Evaluation of Managements Comments OV-AR-00-002 We recommend the chief postal inspector modify the Inspection Service Manual to require the use of birth month and year to calculate cost-avoidance savings for long-term periodic roll cases. The deputy chief inspector, Criminal Investigations, provided comments to the report. The deputy chief inspector identified that the Inspection Service is in general agreement with the results presented in the report. The deputy chief inspector further identified that beginning in fiscal year 2001, the Inspection Service will issue instructions to standardize the computation of cost-avoidance savings in accordance with the recommendation. Managements comments, in their entirety, are included in Appendix E of this report. aMnaegments commrecommendation. iients aer ersponsvie to the

Inspection Service Reporting of Cost-Avoidance Savings Under the Fraudulent Workers Compensation Program Background OV-AR-00-002 INTRODUCTION The Federal Employees Compensation Act provides compensation benefits to civilian employees of the United States for disability due to personal injury or disease sustained while in the performance of duty. The Federal Employees Compensation Act also provides for the payment of benefits to dependents if a work-related injury or disease causes an employees death. Benefits provided under the Federal Employees Compensation Act constitute the sole remedy against the United States for work-related injury or death. All Federal Employees Compensation Act claims are adjudicated, approved, and paid by the Department of Labor, Office of Workers Compensation Programs. The Department of Labor is reimbursed for all claims by the affected federal agency. Title 5 of the United States Code grants the Department of Labor, Office of Workers Compensation Programs, exclusive authority for administrating, implementing, and enforcing the Federal Employees Compensation Act. Title 39 of the United States Code provides coverage of postal personnel under the Federal Employees Compensation Act. The Postal Service is one of the nations largest civilian employers with approximately 792,000 career employees. The Postal Service is also the largest payer of Federal Employees Compensation Act claims within the federal government. A postal employee who experiences a physical or mental injury while on duty is eligible to receive payments for medical treatment and lost wages under the Federal Employees Compensation Act. The injury may be due to a one-time, traumatic incident or an occupational condition that develops over time. The graph below identifies that from July 1, 1998, through June 30, 1999, the Postal Service paid 31 percent (over $594 million) of the total workers compensation costs charged to the federal government. During this same timeframe, the entire federal government combined paid over $1.9 billion in workers compensation benefits.1 1 See Appendix B for a listing of the ten federal agencies with the highest workers compensation costs. 1

Inspection Service Reporting of Cost-Avoidance Savings Under the Fraudulent Workers Compensation Program Fraudulent Workers Compensation Program Cost-Avoidance Savings Methodology %3 %3%4%4 %5OV-AR-00-002 Graph 1. Federal Government Agencies Workers' Compensation Percentage of Total Costs (07/01/98 - 06/30/99) 15% USPS Dept of Navy 31% Dept of Army Dept of Veterans' Affairs Dept of Air Force Dept of TransportationDept of Justice Dept of Treasury Dept of Defense 13% Dept of Agriculture 7% 9% Other Federal Agencies %6The Inspection Service established the Fraudulent Workers Compensation program to support and complement the Postal Service in the management of the Injury Compensation Program under the Federal Employees Compensation Act. The objectives of the Fraudulent Workers Compensation Program are to: Review internal controls and identify problems and solutions to prevent the loss of postal resources and reduce compensation costs. Investigate and initiate administrative, civil, or criminal actions against individuals responsible for fraud, waste, misuse or abuse under the Federal employees Compensation Act. .Inspection Service personnel calculate cost-avoidance savings under the Fraudulent Workers Compensation Program using a standard, internally-generated methodology. Inspection Service personnel calculate cost-avoidance savings for long-term periodic roll and continuance of pay cases. Long-term periodic roll cases are cases in which Department of Labor personnel decide that the employees incapacitation will be long-term and the employee is placed on the periodic, automatic rolls. Continuance of pay cases are cases in which employees incur an on-the-job injury that causes them to be unable to work. These individuals are eligible to receive 2

Inspection Service Reporting of Cost-Avoidance Savings Under the Fraudulent Workers Compensation Program compensation at their stated rate of pay for up to 45 calendar days. OV-AR-00-002 The Inspection Service Manual, Section 930, Fraudulent Workers Compensation (FWC), dated July 30, 1999, identifies that the following cost-avoidance savings methodologies will be used when calculating cost-avoidance savings for long-term periodic roll and continuance of pay cases under the Fraudulent Workers Compensation Program. Long-Term Periodic Roll Cases. Calculated on the basis of a normal life expectancy age of 70. Expected remaining years of claimants life are multiplied by the annual compensation rate or reduction in annual compensation rate. For example, the cost-avoidance savings for a case involving a letter carrier, age 37, receiving $2,000 each payment period of 28 days would be calculated as follows: $2,000 X 13 = $26,000 X 33 years (70-37) = $858,000. Continuance of Pay Cases. Calculated on the basis of an employees daily wage rate multiplied by 30, regardless of the actual number of continuance of pay days avoided. For example, the cost-avoidance savings for a case involving a mailhandler resulting in the savings of 12 days of continuance of pay would be calculated based on the mailhandlers daily wage rate multiplied by 30 days of continuance of pay as follows: $100 (daily wage rate) X 30 days = $3,000. Beginning in fiscal year (FY) 2000, Inspection Service management revised the Inspection Service methodology for calculating cost-avoidance savings for continuance of pay cases. Specifically, the Postal Service National Accounting Office, at the request of the Inspection Service, identified that the average cost per continuance of pay case to the Postal Service was $41,812. Accordingly, Inspection Service management modified the methodology used to calculate cost-avoidance savings for continuance of pay cases to use a standard $41,812 per case. 3

Inspection Service Reporting of Cost-Avoidance Savings Under the Fraudulent Workers Compensation Program MOebtjehcotdivoel,o gSyc ope & OV-AR-00-002 The overall objective of the audit was to assess the effectiveness and accuracy of information reported to agencies external to the Inspection Service. Specifically, we evaluated the accuracy and supportability of cost-avoidance savings calculations under the Inspection Services Fraudulent Workers Compensation Program; the adequacy of the Inspection Service methodology used to calculate cost-avoidance savings; and the purposes for which cost-avoidance savings figures are used. Since Inspection Service cost-avoidance savings for continuance of pay cases amounted to less than one percent of all workers compensation cost-avoidance savings during FY 1999, we focused on the methodology used to calculate cost-avoidance savings for long-term periodic roll cases during our review. To accomplish our objective, we interviewed personnel from the Inspection Service, Postal Service National Accounting Office, and Postal Service Safety and Workplace Assistance Office. We also interviewed injury compensation personnel from the 13 Postal Service area offices. We further intervie2wed representatives from the following federal agencies to identify the methodologies used to calculate workers compensation cost-avoidance savings and to determine the purpos3 es for which cost-avoidance savings figures are used.Bureau of Alcohol, Tobacco and Firearms Defense Criminal Investigative Service Department of Agriculture Department of Defense Department of Labor Department of Justice Department of Transportation Department of Treasury Department of Veterans Affairs Federal Aviation Administration Internal Revenue Service 2 We judgmentally selected the 16 federal agencies for review. The information obtained from federal agency representatives was self-reported and was not independently verified. 3 We identified that the Department of Justice, Department of Transportation, and Department of Treasury did not calculate workers compensation cost-avoidance savings. See Appendix A for the methodologies used by the federal agencies reviewed for calculating cost-avoidance savings for long-term periodic roll cases. 4

Inspection Service Reporting of Cost-Avoidance Savings Under the Fraudulent Workers Compensation Program aMirtmie Admnisitartoi nNaval Criminal Investigative Service Tennessee Valley Authority U.S. Coast Guard U.S. Mint OV-AR-00-002 We selected and reviewed a statistical sample of 50 long-term periodic roll workers compensation cases from FY 1999 to determine the accuracy and supportability of claimed cost-avoidance savings figures. We conducted this review from March through September 2000 in accordance with generally accepted government auditing standards and included such test of control as were considered necessary. We discussed our conclusions and observations with appropriate management officials and included their comments, where appropriate. 5

Inspection Service Reporting of Cost-Avoidance Savings Under the Fraudulent Workers Compensation Program Cost-Avoidance Savings Calculations Calculation Discrepancies OV-AR-00-002 AUDIT RESULTS Our review disclosed that cost avoidance savings were generally accurate and supportable. We identified discrepancies, but the errors did not have a material affect on savings figures reported under the Inspection Service Fraudulent Workers Compensation Program. In addition, cost-avoidance savings figures were adequately documented and the methodology used to generate cost-avoidance savings for long-term periodic roll cases was reasonable. Finally, Inspection Service management primarily used cost-avoidance savings figures for internal purposes, such as evaluating individual and program performance. Based upon a review of the Inspection Service methodology and a comparison of methodologies used by other federal agencies, we concluded that the Inspection Service methodology used to generate cost-avoidance savings for long-term periodic roll cases was reasonable. Specifically, we believe that the cost-avoidance savings calculated using the Inspection Service methodology is a reasonable estimation of savings that could be achieved had the individual remained on the long-term periodic rolls for the life expectancy age calculated. In addition, the Inspection Service methodology resulted in cost-avoidance savings that were similar to the savings calculated under methodologies used by the federal agencies surveyed. See Appendix C for a comparison of sample cost-avoidance savings calculations under the Inspection Service methodology and other federal agency methodologies reviewed. Inspection Service management, like management from the other federal agencies surveyed who calculated cost-avoidance savings, used cost-avoidance savings figures for internal purposes, such as evaluating individual and program performance. We determined that cost-avoidance savings figures were not reported to the Postal Service and, therefore, had no impact on the Postal Services financial or budgetary statements. Although discrepancies in the calculation of cost-avoidance savings had an immaterial impact on claimed savings, discrepancies due to a variation in the application of the 6

Inspection Service Reporting of Cost-Avoidance Savings Under the Fraudulent Workers Compensation Program Recommendation Managements Comments OV-AR-00-002 Inspection Service methodology occurred frequently throughout the projected audit universe. Specifically, we are 95 percent confident that 94 to 123 cases in the audit universe contain a variation in the application of the Inspection Service methodology. See Appendix D for a detailed explanation of the sample results. Discrepancies due to a variation in the application of the Inspection Service methodology relate to the calculation of birth dates and benefit termination dates for long-term periodic roll cases. Specifically, when applying the methodology for long-term periodic roll cases, some inspectors applied both the month and year to the calculation when evaluating birth dates and benefit termination dates, while other inspectors applied only the year. For example, an individual born on August 19, 1968, who had his/her compensation benefits terminated on June 20, 1999, should be considered as being 30 years, 10 months old. However, when the inspector calculated the cost-avoidance savings, the individual was considered to be only 30 years old, thereby overstating the cost-avoidance savings by over $19,000. The consistent application of the Inspection Service methodology would help ensure more accurate calculations of cost-avoidance savings to assist in the evaluation of individual and program performance. We recommend the chief postal inspector modify the Inspection Service Manual to require the use of birth month and year to calculate cost-avoidance savings for long-term periodic roll cases. The deputy chief inspector, Criminal Investigations, provided comments to the report and stated that the Inspection Service was in general agreement with the results presented in the report. The deputy chief inspector further stated that the Inspection Service agrees that consistency and accuracy in the calculation of long-term savings was preferred, and that the variation in calculations by inspectors relative to claimants birth dates is not material to total savings claimed. However, beginning in FY 2001, the Inspection Service will issue instructions to standardize the computation of cost-avoidance savings. Managements comments, in their entirety, are included in Appendix E of this report. 7