City of Tonawanda

Internal Controls Over Health Insurance - Executive Summary

Health insurance benefits are an integral part of an employee’s compensation and represent a significant component of a local government’s costs. The increasing cost of providing health insurance coverage to employees and retirees substantially contributes to the financial challenges confronting local officials. The Mayor of Tonawanda expressed his concern for this situation in his February 2006 State of the City Address, “Without significant changes in our approach to funding health insurance premiums, the City’s health insurance bill will approach $4 million annually in five to six years. This City will not be able to fund basic City services in five years if its health insurance bill is $4 million.”

Pursuant to City policy and labor agreements, the City of Tonawanda provides health insurance coverage to 271 current employees, officials, retirees and surviving spouses. The City also allows six individuals to purchase insurance through the COBRA¹ program. The City offers a choice of four health insurance plans, with the City reserving the right to determine its base provider and plan. Currently the base provider is Independent Health with its Encompass A plan. The vast majority, 98.6 percent, of total monthly health insurance expenses are funded by the City, with employees and retirees contributing less than 2 percent.

Scope and Objective

During this audit, we examined health insurance records for the City of Tonawanda for the period January 1, 2005 through September 13, 2006. The objective of our audit was to evaluate internal controls over the City’s health insurance functions to identify cost savings opportunities. Our audit addressed the following questions:

• Are adequate processes and controls in place for ensuring the accuracy of health insurance bills for current and retired employees?
• Are adequate policies and procedures in place to ensure timely collection of all insurance premiums due to the City?
• Has the City initiated any other practices, which have resulted in health insurance cost savings that other local governments may emulate?

Audit Results

Generally, the City has adequate health insurance billing and collection processes in place that are working effectively. However, the City lacks written procedures regarding the day-to-day administration of health coverage for City employees, officials, retirees and COBRA participants.

We examined records for all employees, retirees, and COBRA participants currently receiving City group health insurance coverage. We compared benefits received to the current collective bargaining agreements, or those in place at the time of their retirement. We found that five individuals have been provided COBRA benefits that they were not entitled to. Individuals are permitted to remain on this program indefinitely. In one case, the individual does not qualify for COBRA participation as she is employed in the private law office of the City Attorney and not a city employee. This practice provides selected individuals with less expensive coverage than what they could purchase on their own.

The City has saved over $200,000 during a sixteen-month period, in 2005 and 2006, by purchasing a lower costing health insurance plan and funding the additional costs for out-of-pocket expenses. However, our review of the City’s payment in lieu of health insurance program determined that, in certain instances, inconsistent language in employee contracts has hindered the City’s ability to maximize the cost savings opportunities of the program. The inconsistencies allow certain married employees covered under different collective bargaining agreements to receive both health insurance coverage and the waiver payment from the City.

Comments of Local Officials

The results of our audit and recommendations have been discussed with City officials and their comments, which appear in Appendix A, have been considered in preparing this report. City officials generally agreed with our recommendations and indicated they planned to initiate corrective action.