Documenting Insurance Audit Adjustments: A Step-By-Step Guide To Recording Payments

Recording an insurance audit adjustment payment is a crucial aspect of maintaining accurate financial records and ensuring compliance with insurance requirements. An insurance audit is conducted to verify that a business has paid the correct premiums during a specific period of insurance coverage, often focusing on workers' compensation insurance. This process involves examining business records, including payroll data, employee information, and financial documentation. By comparing estimated figures with actual numbers, insurance carriers can assess the extent of risk they assumed and adjust premiums accordingly. Proper recording of insurance audit adjustments is essential for effective risk management and maintaining financial integrity.

Understanding the purpose of an insurance audit

The word "audit" often carries negative connotations, with many people associating the term with IRS tax audits. However, an insurance audit is a different and much less intimidating process. It is a routine part of commercial insurance policies and can even benefit your business.

An insurance audit serves as a carrier's method for assessing the extent of risk they assumed throughout the preceding year. It helps ensure that you have the right amount of insurance coverage and that you are paying the correct premium amount. The audit confirms the exact total of your business exposures for the year, including factors such as employee payroll, gross sales, and the cost of subcontractors.

Insurance audits are typically conducted yearly, near the end of the year or when your policy expires. They are used to assess general liability, workers' compensation, commercial car insurance, commercial property insurance, and umbrella insurance.

During an insurance audit, insurance auditors typically review payroll records, employee records, gross sales, and contractor/subcontractor records. They may also examine certificates of insurance, which provide information about the insurance policies of the contractors who worked on a project.

The purpose of an insurance audit is to ensure that your business has the appropriate level of insurance coverage based on your changing circumstances. For example, if your sales increase, you may need to hire more employees, which would impact your insurance needs. Similarly, if your gross sales decrease or you reduce your workforce, these changes should be reflected in your insurance policy.

Following an insurance audit, you may be eligible for a refund if you overpaid your premium, or you may need to pay an additional premium to cover any shortfall.

Preparing for an audit

Insurance audits can be scary, but they don't have to be. They are a common industry practice and can even bring some insurance savings to your business. Here are some steps to prepare for an audit and ensure the process goes smoothly:

• Understand the purpose of the audit: Insurance audits are conducted by insurance companies to assess the extent of risk they assumed throughout the preceding year and to ensure your business is insured for the correct amount of risk. They also verify that you are paying the correct premium amount based on your business's annual revenue and/or payroll.
• Know what to expect: The audit process typically involves reviewing financial records, including payroll data, employee records, payment records, and certificates of insurance. The auditor will notify you in advance of the specific records they need to examine, so make sure you have those documents readily available.
• Be timely: Respond to the audit notification promptly and provide all requested information by the deadline. If you need more time to locate specific documents, don't hesitate to request an extension from the auditor.
• Maintain accurate records: Keep your financial documents, payroll, and classification codes up to date. This will help you easily provide the necessary information during the audit and reduce the risk of errors or discrepancies.
• Cooperate with the auditor: Treat audit notifications seriously and provide honest and accurate information. Do not modify or conceal any requested records, as this could lead to negative consequences, including failing the audit and facing legal repercussions.
• Seek assistance: If you have concerns about the audit or feel overwhelmed by the process, consider seeking legal advice or working with an insurance agent or broker who can guide you through the process and ensure your business is properly protected.

Remember, insurance audits are a normal part of doing business, and by staying organized and cooperative, you can make the process much less intimidating.

How to respond to an audit

How to Respond to an Insurance Audit

Insurance audits can be daunting, but they are a normal part of the industry and can even bring about insurance savings for your business. Here are some steps to take when responding to an insurance audit:

• Don't panic! An insurance audit does not necessarily indicate any improper activity on your part.
• Review the audit notification carefully. Pay attention to the send date, deadline, number of patient charts and documents requested, and the stated reason for the audit.
• Alert your compliance officer or staff member in charge of audits. They can begin gathering the requested information and make the best use of time before the records are due.
• Determine if you need to hire an attorney. If you have concerns about the audit, you may want to consult with an experienced healthcare attorney to ensure compliance with laws and regulations.
• Prepare all requested information. This typically includes medical records, invoices, and other materials. Commercial payors usually require a physician's signature affirming that the records constitute the entire medical record for the patient.
• Meet the deadline. Send copies of everything requested unless an original is specifically asked for. If you can't find a particular document, request more time from the auditor.
• Correct issues and use the audit as a learning tool. After the audit, review and address any problems found. Use the results to improve your understanding of proper practices and train your staff accordingly. This will help minimise future risks.
• Understand the purpose of the audit request. Insurance companies may contact you under the Risk Adjustment Audit process to review medical necessity or proper coding. An inquiry into fraud, waste, and abuse is often indicated by an audit letter from the Special Investigations Unit (SIU).
• Obtain informed consent from patients. Ensure your informed consent form includes language that allows you to provide information to insurance companies when requested. Inform patients that using their out-of-network or in-network benefits may require them to provide access to their records to support claims. Explain the potential consequences of failing to comply with audit requests, such as claim denials or demands for repayment of previously paid claims.
• Understand record-keeping requirements. Familiarise yourself with the policies of the patient's insurance company, especially regarding documentation standards for medical necessity. Typically, they require information such as the patient's name, date of birth, start and stop times for therapy, diagnosis, symptoms, and treatment goals and response.
• Maintain detailed and accurate records. Keep your financial documents, payroll, and classification codes up to date to facilitate a smoother audit process.

Adjusting insurance premiums

Reasons for Adjusting Insurance Premiums:

• Risk Assessment: Insurance companies frequently adjust premiums based on their assessment of the insured's risk. For example, if an individual purchases health insurance and later develops a medical condition that increases their likelihood of requiring expensive treatments, the insurer may raise their premiums. Conversely, if the insured takes steps to reduce their risk, such as improving safety measures or adopting healthier habits, the premiums may be lowered.
• Inflation and Cost Adjustments: Insurance premiums may also be adjusted to keep up with inflation or changes in the cost of providing coverage. This is particularly common in long-term insurance policies, as the initial premium may no longer be sufficient to cover the expenses over time.
• Policy Changes: Policyholders may request adjustments to their insurance premiums by changing the terms of their coverage. For example, increasing the deductible on a car insurance policy will usually result in a lower premium, as the insured is willing to bear more of the financial burden in the event of a claim.
• Experience Rating: In some cases, insurance premiums are adjusted based on the actual claims experience of the insured. This is often seen in workers' compensation insurance, where premiums are initially based on estimated payroll and risk factors. After a policy period, the insurer will review the actual claims and adjust the premiums accordingly.

Types of Premium Adjustments:

• Adjusted Premium: An adjusted premium refers to a premium that is not fixed and can be modified by the insurer throughout the life of the policy. This is commonly found in life insurance policies, where the premium may be lower in the early years and increase later on before levelling out. The adjustment reflects the costs associated with acquiring the policy and the expected lifespan of the policy.
• Risk Adjustment: Risk adjustment is a mechanism used in health insurance to redistribute funds from plans with lower-risk enrollees to those with higher-risk enrollees. This discourages insurers from avoiding high-risk individuals and promotes competition based on the value of their plans. It helps stabilise premiums and ensures fair payment to insurers.
• Minimum Premium Adjustment: This refers to the minimum amount that can be charged for a particular type of insurance coverage, per policy, type of coverage, or location. It sets a threshold below which the premium cannot be reduced.
• Premium Adjustment Clause: This clause allows for a total return of up to 50% of the initial premium amount. It is based on the final sum insured and is applied to the premium paid at the start of the insurance period.

Best Practices and Considerations:

• Timely Reviews: It is important for both insurers and policyholders to review insurance policies periodically to identify areas where adjustments may be necessary. This could include assessing changes in risk factors, inflation, or actual claims experience.
• Transparency and Communication: When making adjustments to insurance premiums, it is crucial to maintain transparency and effective communication between the insurer and the policyholder. This helps ensure that all parties understand the reasons for the adjustments and promotes trust in the insurance relationship.
• Compliance and Regulations: Adjusting insurance premiums should always be done in compliance with relevant regulations and laws. Certain types of insurance, such as workers' compensation, may have specific rules regarding premium adjustments that must be followed.

Recording insurance reimbursement

Understanding Insurance Audits

Insurance audits are conducted by insurance carriers to assess the extent of risk they assumed during a specific period, usually a year. These audits are necessary as the risk profile of a company can change significantly over time, impacting the insurance coverage required. The audits primarily focus on self-reported projections, such as sales and payroll figures, which form the basis for calculating insurance premiums.

Recording Reimbursement

To record insurance reimbursement, follow these steps:

• Determine the Proceeds of Damaged Property: Calculate the total amount received from the insurance company as compensation for the damaged property. This amount represents the insurance proceeds.
• Locate the Repair Cost Entry: Find the entry in your records that reflects the cost of repairing the damaged property. This amount can be validated with a receipt or invoice. The line item for this entry is typically labelled as "Repairs from Damaged Property".
• Debit Insurance Proceeds to the Repairs Account: In your accounting records, debit the insurance proceeds to the repairs account. The journal entry should appear as follows: Debit Insurance Proceeds on Damaged Property and Credit Repairs for Damaged Property.
• Record a Loss on the Insurance Settlement: In some cases, the insurance company may reimburse an amount less than what you paid for repairs. This typically occurs when the net book value of the property (book value minus accumulated depreciation) exceeds the reimbursed amount. To record this loss, make the following entries: Debit Insurance Proceeds on Damaged Property, Debit Loss on Insurance Settlement, and Credit Property Account.
• Handle Surplus in the Account: If the insurance company reimbursed an amount greater than what you paid, adjust your records accordingly. Make the following entries: Debit Insurance Proceeds on Damaged Property, Credit Property Account, and Credit Surplus on Insurance Settlement.

Additional Considerations

It is important to note that insurance audits are not limited to reimbursement for damaged property. They can also apply to other areas, such as workers' compensation insurance and healthcare insurance claims. Additionally, the timeline for insurance audits may vary, with some occurring annually or at the end of a policy period.

Furthermore, maintaining accurate and up-to-date financial records is crucial for a seamless insurance audit process. This includes payroll data, employee classification codes, and financial documentation such as invoices and medical records. Staying compliant with the audit requirements helps avoid fines, penalties, and negative consequences for your business.

Frequently asked questions