Benefits Cost Control: Dependent-Eligibility Audits Help Rein in Health Care Costs

Copyright 2008 Institute of Management & AdministrationAll Rights Reserved Managing Benefits Plans

December 2008

HUMAN RESOURCES Vol. 2008 No. 12

1535 words

Benefits Cost Control: Dependent-Eligibility Audits Help Rein in Health Care Costs

As a rule of thumb, companies save $2,000 to $5,000 every time they cull an ineligible dependent from their health plan. In removing ineligible dependents, employers usually follow a two-step procedure. First, they ask employees to report covered dependents who are ineligible for health benefits because they have "aged out," have dropped out of college, or are ex-spouses. Following enrollment adjustments during this so-called amnesty period, companies ask for documentation--tax returns or school transcripts--from employees proving dependent eligibility.

Requests for reimbursement for past coverage of ineligible dependents or the termination of employees with ineligibles in the plan are rare, however. The goal of companies is to remove ineligibles, not to punish employees who, for example, may not know that their college-age children have taken the semester off.

Companies that conduct these audits, which include HRAdvance Enterprises and Impact Interactive, maintain that from 2 percent to 12 percent of dependents on health care rolls are ineligible. They maintain that ineligible dependents are generally on the rolls because of ignorance or negligence, not deliberate fraud. According to Watson Wyatt Worldwide, 74 percent of large companies plan to conduct dependent audits in 2009, up from 53 percent this year and 42 percent in 2007.

Many benefits managers have mixed reactions to these dependent audits. Certainly, they do not relish playing the bad guy and ending health coverage for employee family members. On the other hand, Sarbanes-Oxley requires companies to maintain controls that ensure appropriate use of company funds. Furthermore, the Employee Retirement Income Security Act declares through its exclusive benefit rule that an employer's health plan must be for the exclusive benefit of a firm's employees or their beneficiaries.

And indeed a growing number of organizations are conducting dependent eligibility audits that require affected employees to provide birth certificates, marriage licenses, college enrollment records, and tax returns to confirm the relationship between workers and their spouses or children.

"Truthfully, I don't believe most employees are being dishonest," said Karen Frost, health and welfare benefits outsourcing strategy leader at Hewitt Associates in Lincolnshire, Ill. "Many employees just don't know the rules and leave dependents on [health plans] long after they are ineligible."

Among Hewitt's employer clients that have undergone such audits, between 4 percent and 7 percent of dependents enrolled in health plans have been identified as ineligible for coverage, Frost said.

Meanwhile, in the dependent eligibility audits that Watson Wyatt Worldwide has conducted for employers nationwide, an average of 10 percent to 12 percent of dependents have been identified as ineligible for coverage, said Los Angeles-based Greg Mansur, the human resources consultant's national leader of administrative performance reviews. Depending on company size and other factors, the number of dependents declared ineligible in health plans can range from 3 percent to 20 percent, Mansur said.

"I have no sense of how much we are seeing here is actually fraud versus people just not really paying attention to the plan," Mansur said. "I know it's a mixture of the two."

Some employers and health plans have taken legal action when ineligible dependents are identified on plans.

Still, Kirk Nahra, a health care and privacy attorney at Wiley Rein LLP in Washington, D.C., said that it is "pretty unusual" for an employer or health plan to take legal action against an employee based on an ineligible dependent being enrolled in the plan.

"People don't like to sue their employees," he said. "You can sue them anytime something was done inappropriately, but I would discourage that."

"You want to go after those who intentionally [engage in] wrongdoing," Nahra said. "But sometimes the public relations risks are worse than the legal risks."

When conducting a dependent eligibility audit, Nahra said, organizations should be clear about obtaining employee information in their capacity as an employer versus their role as a vehicle that funds the health plan. He noted that the Health Insurance Portability and Accountability Act rules apply to health plans but not to employers.

"Sometimes employers ask health insurers for data. Sometimes they want eligibility files the health [insurer] has or claims history, which starts to get a little bit problematic," Nahra said. "Employers should be very careful about getting claims history. That's an area where those HIPAA lines get so blurry that it's almost impossible to do it right."

Savings spark interest. Dependent eligibility audits are not new, but in recent years there has been a resurgent interest in them among employers as a cost-control mechanism, said Rebecca McLaughlan, principal and managing director at McGraw Wentworth, an HR consulting firm in Troy, Mich.

"Plans realize true savings by removing ineligible dependents from the plan," McGraw Wentworth analysts said in A Guide to Dependent Eligibility Audits, released in April 2008. "Estimates vary, but most agree that removing an ineligible dependent will save an employer from $2,400 to $5,000 per individual."

"Employers with self-funded plans--where claims are paid directly by the employer rather than an insurer--could potentially save even more," according to the guide.

Pittsburgh-based Daniel Priga, a principal in Mercer's health and benefits consulting segment, said the number of clients that the organization has worked with on such audits in the past 12 months is double what it was in the previous12 months.

"There's a lot of interest because the potential savings is pretty great," he said.

In 2004, Atlanta-based Delta Air Lines Inc. announced that more than 7,000 dependents covered under the company's health plan had been removed after an in-depth process to identify those who were ineligible for coverage. Delta has 49,000 employees worldwide.

Delta spokesperson Patti Futrell noted that, instead of a comprehensive audit, Delta "now implements periodic audits on a sampling of the employee population, with a heavier sampling percentage for employees who have dependents who are full-time students."

Among ineligible dependents, Mansur at Watson Wyatt said a fourth generally are individuals enrolled as a "spouse" on the company's health benefits plan when they are not. "The balance--75 percent--are children under age 18 or college-age children," he said.

For health plans to qualify children over 18 as dependents eligible for medical benefits, they must be enrolled full-time in college or meet other criteria. But sometimes, when the child is no longer attending college full-time, their parents do not notify their employers of the change in status, benefits analysts said.

Futrell said Delta sends a letter annually to its employees who have dependents between the ages of 19 and 23. "Those employees are given several weeks to submit appropriate documentation that their dependents over age 18 are full-time students," she said, "or to update their benefits information online to change the status of a dependent."

‘Relaxed, moderate, or aggressive.' McGraw Wentworth's audit guide outlines steps employers can take to conduct "relaxed, moderate, or aggressive" audits.

With a relaxed approach, employers offer "employment amnesty" and "claims amnesty," according to the guide. Employment amnesty means the employer will not fire workers who acknowledge they have an ineligible dependent enrolled in the health plan. Claims amnesty means the plan will not take steps to recoup payments made to employees for care the ineligible dependent received.

With an aggressive audit, employment amnesty is not offered, according to the guide, and the insurer attempts to recover claim payments.

While the aggressive approach is the most effective in ensuring that only eligible dependents are enrolled in the health plan, "Employees may be irritated or offended by this approach and find it burdensome to find and submit paperwork," the McGraw Wentworth guide stated.

Other tips that health benefits consultants recommend to employers include:

Decide early what the company will do when an ineligible dependent is identified. "Some employers go through the audit and then feel uncomfortable dropping the dependents," said Frost at Hewitt. "If they don't do the dropping, they don't save anything."

Outline a thoughtful business case for why the audit is being conducted and share it with employees. "Communicate to employees why you're doing this and what will happen if something is found," advised Princeton, N.J.-based Mark Rucci, senior vice president of Gallagher Benefits Services Inc.

Hold an amnesty period to give employees a chance to make changes about dependent eligibility for health coverage without any risk of penalties. "It's the simplest way to alleviate the vast majority of the problem when it's simply people not understanding the rules," Frost said.

Share the audit results with employees. "It makes people feel better to know that they went through all this and [the employer] didn't find just one guy who was cheating," Rucci said.

November 6, 2008