Unemployment insurance: identifying payment errors Essay

A system for detecting payment errors in the unemployment insurance
program was recently developed by the U.S. Department of Labor. This
system has made it possible to identify the level of both fraud and
nonfraud overpayments, as well as underpayments, in the program. Prior
to the introduction of this detection system, it was not possible to
determine the extent and nature of payment errors.



Currently, the detection system–known as the random audit
system–is operating in 46 unemployment insurance jurisdictions. The
remaining jurisdictions will be included in this program or its
successor (the UI quality control program) during fiscal year 1985. At
that time, the audit system will provide a basis for: (1) estimating the
extent of payment errors in the nationwide unemployment insurance
program; (2) indentifying the primary sources of the payment errors; (3)
implementing corrective action, where appropriate; and (4) evaluating
the effects of such corrective actions (or other programmatic changes)
on unemployment insurance payment accuracy. This summary discusses the
design and methodology of the random audit system and presents findings
from the pilot tests conducted in five States–Illinois, Kansas,
Lousiana, New Jersey, and Washington–over a 1-year period ending in
March 1982.



Because of the large volume of weekly payments made in the
unemployment insurance system, it would be prohibitively expensive
(under current law and policy) to verify each claimant’s
eligibility to receive benefits. Thus, the random audit system relies
on a small sample of payments made in each unemployment insurance
jurisdiction as the basis for estimating the extent and nature of
payment errors. The payments selected for investigation are taken from
a specially constructed computer file of weekly statewide unemployment
insurance payments in each participating jurisdiction. Each week, a
probability sample of cases is selected from the file, and the results
of verifying benefit eligibility for those cases are used to estimate
statewide payment errors; quarterly estimates are developed for each
unemployment insurance jurisdiction.


After a sample has been selected for review, a detailed and
consistent procedure is followed. When cases are selected for
investigation, it is assumed that claimants have been properly paid, and
this opinion is changed only if documented evidence to the contrary is
rpresented.



Verification of benefit eligibility includes the following
procedures: (1) files related to the case are obtained and reviewed; (2)
the base period wages upon which the claimant established his or her
claim for benefits are verified (with employers if possible); (3) a
personal interview with the claimant is conducted to verify relevant
facts regarding the individual’s claim for benefits; (4) the
claimant’s reasons for separation from previous employers are
verified to determine if any disqualifying circumstances were involved;
(5) attempts are made to verify if the claimant was able and available
for work during the sampled week; (6) if applicable, employers listed by
the claimant as work search contacts during the sampled week are
contacted for verification as to whether the claimant actually applied
for work; (7) as appropriate, attempts are made to determine if the
claimant refused any offers of “suitable” work that would
disqualify the individual from receiving benefits; (8) attempts are made
to determine if the claimant accurately reported any earnings or work
performed during the sampled week; and (9) depending on the
circumstances of the case, other individuals may be contacted to verify
any other determinants that could affect the claimant’s eligibility
for benefits during the sampled week.



On the basis of information acquired during the verification
process, the field investigator makes a judgment as to whether the
claimant met eligibility requirements for the benefits received. If an
overpayment is suspected, careful review procedures are followed. First,
the investigator interviews the claimant a second time in order to
provide the claimant an opportunity for rebuttal of evidence acquired
during the investigation. Second, a review is requested from the
manager of the local unemployment insurance office in which the claim
for benefits was filed. Third, the case file is reviewed by the State
random audit system supervisor and, in some cases, by a Federal review
team (representing the national office of the unemployment insurance
service). If the State determines that the payment was in error and the
claimant files for an appeal, a representative of the State random audit
unit is available to present relevant evidence affecting the case. In
the event of a reversal of the overpayment determination, the results
recorded for the case are modified to reflect this final status of the
sampled payment.


Verifications of benefit eligibility are conducted by unemployment
insurance personnel from each participating jurisdiction to ensure that
each sampled case is reviewed in accordance with the respective
State’s law and policy. Each full-time unemployment insurance
investigator assigned to the random audit program normally receives no
more than three cases on a weekly basis. In contrast, a full-time State
unemployment insurance claims examiner assigned to a local office
typically would process at least 50 times as many cases in a week.
Limitations of the random audit system



Several limitations of the random audit system and its data should
be noted. For example, the random audit system and its data should be
noted. For example, the random audit system tends to produce
“low-side” estimates of the payment errors that characterize
State unemployment insurance programs. This tendency appears to result
from the following: First, unemployment insurance benefits are paid with
at least a 1-week lag, so that “ex post facto” efforts are
required to determine if benefits have been paid in accordance with the
State’s employment security law and policies; the longer these
investigations are delayed, the more difficult it is for claimants and
others to accurately recall relevant facts, making it more difficult to
document payment errors. Second, the provisions of each State’s
employment security laws and policies limit the extent to which a
claimant’s activities may be investigated to determine if a payment
error occurred. Third, because of the very long time lags usually
involved in detecting instances of unreported earnings in unemployment
insurance-covered employment through a “postaudit,” this
procedure is not utilized as part of the standard random audit
investigation, resulting in some understatement of overpayments that
actually occur. Fourth, unreported earnings in the “cash
economy” are extremely difficult to detect, even if
“postaudit” procedures are utilitized. Fifth, sampled
payments are considered correct ulness documented evidence to the
contrary is made available; given the complexities of the employment
security laws and policies that specify the eligibility
criteria–especially those related to the “availability for
work” and “active-search-for-work” requirements–it is
likely that overpayment errors are somewhat understated simply because
unrefutable documentation could not be obtained. The nature of the
payment errors that cannot be detected by the random audit system is
such that many would be established as fraud overpayments if they were
detected; hence, the estimates provided by the random audit system of
fraud overpayments are very likely to be more understated than is the
case for all overpayments.



The principal findings of the random audit system pilot tests are
summarized below. These results are indicative of the types of
information currently being produced on a quarterly basis in the 46
unemployment insurance jurisdictions in which the random audit system is
currently operating, but it should be noted that a variety of other data
elements also are collected in this system.



Table 1 shows the estimated percentages of weeks paid statewide
with either an overpayment or an underpayment of any amount. The total
percentage of weeks paid with such errors ranged from 12.2 percent in
Louisiana to 52.1 percent in New Jersey; the findings also indicate that
overpayment errors tended to be much more common than underpayment
errors in the five pilot test States. Underpayments, as a proportion of
all dollars paid, were estimated to be 1 percent or less in each State,
indicating the insignificance of underpayments.



In sharp contrast, the rates of unemployment insurance overpayments
in the five States ranged from 7.3 percent in Louisiana to 24.3 percent
in New Jersey; overall, double-digit overpayment rates were estimated
for 3 of the 5 States. A comparison of the percentage of dollars
overpaid with the percentage of weeks overpaid indicates that payment
errors of small dollar amounts were relatively frequent in these States.
In Washington, for example, 20 percent of the weeks paid but only 9.3
percent of the dollars paid were estimated to be overpaid. Similarly,
in New Jersey, 38.2 percent of the weeks paid but only 24.3 percent of
the dollars paid were estimated to be overpaid. The principal cause of
these relatively frequent overpayments involving small dollar amounts
was errors in the reporting or recording of base period earnings.



Because of the historical interest in and concern about fraud in
the unemployment insurance program, a separate measure of fraudulent payments is provided by the random audit system; estimates for the five
pilot test States indicate that “officially established”
fraudulent payments constituted only a small portion of the total
dollars paid in each State; fraud rates ranged from 0.2 percent in
Kansas to 2.7 percent in Louisiana. As noted earlier, however, the
absence of postaudits to detect unreported earnings in covered
employment and the difficulty of detecting unreported earnings in the
“cash economy” tend to understate the “true”
magnitude of the fraud problem in the unemployment insurance program.



The random audit system also produces information on both the
“types” and causes” of payment errors in the unemployment
insurance program. Types of payment errors are classified on the basis
of whether the error was the “responsibility” of the
unemployment insurance claimant, covered employers, the State
unemployment insurance agency, or a combination of the three. Causes of
payment errors are classified on the basis of which aspects of
employment security law or policy were violated, including: errors in
the reporting or recording of earnings during the sampled week for which
the payment was made; errors in the reporting or recording of base
period earnings; violations of “continuing” eligibility
criteria (refusals of suitable work, nonavailability for work, inactive job search); disqualifying reasons for separation from previous
employers; and other factors. In the current system, statistical
information is provided for specific causes of unemployment insurance
payment errors only if such causes account for at least 1 percent of
quarterly unemployment insurance payments.



THE NATIONAL RANDOM AUDIT is a major step forward in controlling
payment errors in the unemployment insurance program. This is an
essential program because it provides statistically reliable estimates
of payment error rates for entire unemployment insurance jurisdictions.
This permits not only identification of payment errors, but also the
means through which the fundamental problems can be diagnosed and
solved. Furthermore, the capability of the system to provide timely
evidence on such payment errors facilitates evaluation of the effects of
the various types of corrective actions that may be undertaken in
individual unemployment insurance jurisdictions. The compilation of
this systemwide data base should prove to be a valuable research tool.

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