Employers can cut health insurance costs by identifying ineligible dependents and kicking them off the plan. Most employees will cheer.
Despite strategies to contain health-care insurance claims through wellness programs, disease management and plan benefit adjustments, spiraling premiums can make an employer's head spin. Companies are finding 2011's average premium increase of 8.8 percent to be a five-year high, according to Hewitt Associates, a human resources consulting firm.
In the past decade, Hewitt reports, employers' health-care premiums have more than doubled from $4,083 per worker in 2001 to $9,821 in 2011. Percentage-wise, employees have fared even worse. On average, each worker's share of medical benefit costs has more than tripled, from $1,229 in 2001 to $4,386 in 2011.
For employers, it's painful enough to watch claims and premiums rise for the people they want to protect-employees, their spouses or domestic partners and their kids. But it can be downright infuriating to discover that health-coverage dollars are being paid out to cover claims by someone who shouldn't even be in the plan--a former spouse or estranged partner, for example, or a child who's 30 years old, or a 10-year-old nephew who's been somehow transformed into a "son."
Footing the bill for ineligible dependents' health benefits is more widespread than many employers realize. Mercer, a global consulting firm, estimates that between 2.5 percent and 6.5 percent of covered employees cannot produce valid dependent verification. Mercer calculates the average health-care cost of each dependent to be between $2,100 and $3,000. Do the math.
As companies search for ways to cut expenses, it's not surprising that dependent eligibility audits have emerged as one cost-control tool. The audits require employees to document the eligibility of dependents enrolled in the employer's medical and dental plans. Ineligible dependents are dropped from coverage.
"Employers have to be creative in finding ways to provide quality benefits at affordable rates, but this really is a no-brainer," says Bruce Borgos, HR audit services director for Secova, a benefits management consultant based in Newport Beach, Calif.
"It's only common sense to know who's eligible," agrees Tom Hadley, senior vice president and employee benefits practice leader for the Columbus office of Wells Fargo Insurance Services. "Too often, employers don't really know who's on their health-care plan and they're unnecessarily paying more."
"If you haven't done it, you should," advises Helen Darling, president of the National Business Group on Health in Washington, D.C. "Health care costs so much today that employers need to make sure they're delivering services and providing benefits only for legitimate dependents. Companies can save a significant amount of money almost immediately simply by making sure covered dependents are eligible."
It seems logical that health insurance companies would support eligibility audits, but C.E.O. had no luck in getting insurers to discuss the topic. UnitedHealthcare and Anthem declined to be interviewed, while Aetna and Medical Mutual did not return phone calls.
As for employees, the only ones likely to be unhappy about an audit are the cheaters who've enrolled ineligible dependents in the health plan. Honest employees-the vast majority-don't want plan costs driven up by a few bad apples. "It doesn't take much to convince most employees," Borgos says. "Everybody understands that there's not a lot of fat left in any organization in today's economy. In the end, everyone saves money. Who doesn't want that?"
A dependent eligibility audit can be conducted internally, but most businesses hire an outside contractor. "We meet with the client to understand the company's objectives, the timeline and the employee population. We talk about approaches and methods and determine where the data will come from," says Lori Wagner, a Cleveland-based senior consultant with Findley Davies, an HR benefits consulting firm.
It's best to audit the entire payroll. "If you use a random sample, you may audit someone who had a big claim. Staff-level employees might not see managers being audited. A full-blown audit helps to avoid the appearance of discrimination, even when the sample truly is random," Wagner says.
The initial communication to employees sets the tone. Usually a joint letter from the business and consultant, it discusses the rationale behind the audit, how it works and why it's important for every employee to respond. Subsequent communications include the health-care plan's definitions of eligible dependents and what documents qualify as verification.
"In the past, providing certification documents was a hassle. The hassle hasn't gone away, but the ability to submit documentation online via a secure website has reduced the hassle factor," says Dan Priga, Mercer's national business leader of the performance audit group. "Online submission also gives employers almost immediate feedback regarding participation level and other statistics."
When the Franklin County Cooperative Health Benefits Program conducted a dependent eligibility audit in 2010, it turned to county agencies and unions. "It was a full-court press to reach as many employees as possible," says benefits administrator Scott Solsman. "They reached out to the employees who hadn't participated yet and explained why participation was necessary. We provided them lists three different times, and each time the nonparticipant numbers were lower." The benefits cooperative covers 5,200 employees with 8,800 dependents in Franklin, Fairfield and Pickaway counties. Secova assisted with its audit.
Dependent eligibility audits typically allow for a grace period during which employees can voluntarily remove a dependent without consequences. An employee may also be allowed to submit verification after a stated deadline without losing the dependent's coverage.
Removal of ineligible dependents through an audit often helps to delay or reduce premium increases. "Health-care benefits increasingly are expensive," says Larry Jeffries, senior human resources director for Parma Community General Hospital near Cleveland. "We won't apologize for asking for verification to help keep costs affordable for the hospital and for our employees." The hospital contracted with Findley Davies for its 2009 dependent eligibility audit.
"The goal of dependent eligibility audits is to identify ineligible dependents and remove them from the plan to reduce costs," says Borgos. "The audits educate or re-educate employees about the eligibility rules and how to comply. The goal is not to kick people off the plan. If we had a case with any client where we could verify 100 percent of their dependents, we'd be ecstatic. It would show they were doing everything right."
Once an audit has been completed, employers should consider requiring dependent verification as each new employee signs up for health coverage. "Doing so reduces the need for another audit. Paperwork from the past is cleaned up and new dependents are verified at the outset," Darling says.
It's common for former spouses with court-ordered health coverage to be on the list of ineligible dependents, as well as domestic partners when a plan doesn't specifically cover them. Often it's easier and cheaper for an employee to keep the ex or partner on the company's plan, rather than to buy separate coverage. Stepchildren (when the plan specifically excludes them), foster children and grandchildren frequently are dropped from the rolls after audits, as are friends and roommates.
Rarely does an employee attempt to fake an eligibility document. "What happened in our audit was that people just didn't turn in the verification documents at all. It's not like they turned them in and then were denied access to the plan," Solsman says.
Although some employees may knowingly add ineligible dependents, most employers give employees the benefit of the doubt, preferring to blame ignorance rather than fraud. "How many people really sit down and read their health insurance plan documents? In reality, not many," Priga says.
"Eligibility definitions are complicated, and I believe most employees don't understand the rules," says Wagner. "I see some managers and even HR staff that don't know all of the finer points about eligibility."
"In the past, family structures weren't as complex as they are today," agrees Darling. "Family structures evolved, but companies didn't change their benefits plans and practices to reflect those societal changes."
The convenience of online enrollment may lead to lax verification. "Employers can ask the employee to certify the dependent is valid at sign-up, but they don't always follow up and ask for supporting documentation," Wagner says.
With so many gray areas and fuzzy edges, it's not surprising that employers rarely seek repayment of benefits previously paid on behalf of dependents who turn out to be ineligible. It's easier to simply strike the dependent from the plan and move on.
Return on Investment
Dependent eligibility audits aren't cheap, but there's a good chance the savings will exceed the cost.
"Of our 8,800 dependents, only 284 weren't verified and [were] taken off the insurance plan. That's 3.2 percent," says Solsman of the Franklin County Cooperative Health Benefits Program. "Take into account the $145,000 cost of the audit, and we project we'll save $950,000 in a benefit year." The dropped dependents included 71 ex-spouses and 113 children.
Borgos was part of the Secova team that assisted the co-op. "This audit was successful because Scott and his team, they could tell us about their membership and the peculiarities of the plan," he says. "They also gave us valuable input on their audit's design, structure and timeline."
Parma Community General Hospital also experienced a positive audit outcome. About 1,700 employees with 1,562 dependents were eligible for its health-care plan in 2009. Of those, 1,348 employees were enrolled. All told, 30 dependents were voluntarily removed from the plan by employees and another 23 were not verified. The net savings: $143,000.
"We sent a letter thanking our employees for participating and we shared the results. We had a lot of positive feedback that they appreciated knowing the outcome," Jeffries says.
Jeffries won't divulge how much the Parma audit cost, but he acknowledges the savings total was unexpected. "We're a community hospital. We know our employees and have a good grasp on our HR functions," he says. "But, yes, in the end we were surprised with the audit results and the savings."
"Companies with sloppy paperwork or high turnover will see greater savings than companies with strict enrollment procedures and a stable workforce," Hadley says. "Small employers usually have someone looking at every penny and asking if these are all of my people. The larger the company gets, the less they're able to look at every penny, so there's a greater chance of money falling through the cracks."
PPACA, ERISA and SOX
Effective Jan. 1, 2011, employers were required to adjust their health-care plans to comply with one provision of the Patient Protection and Affordable Care Act of 2010: the extension of health-care benefit eligibility to children up to age 26. Mercer estimates the influx of newly eligible dependents will increase health-care costs between 0.25 percent and 2 percent.
"It used to be that most employer health-care plans covered dependent children to age 19, or age 23 if they were a full-time college student and were tax-dependent on the parents," says attorney Georgeann Peters, a partner at Baker Hostetler. "Under health-care reform, plans generally cover children up to age 26 without requiring them to be full-time students or tax-dependent. The one variation is that if the child has health-care coverage through his own employer, the parent's plan doesn't have to cover the dependent."
Ohio businesses face an additional twist. "Ohio law as it pertains to fully insured plans requires employers to cover dependents until age 28," Peters says. "But from age 26 to 28, the employer is not required to pay for it. If the employee wants to keep the coverage, the employer can require the employee to pay the entire cost for those two years."
The new law also makes it more difficult to revoke benefits previously paid for an ineligible dependent. "Employers can no longer rescind coverage for ineligible dependents unless they can prove fraud," says Peters. "That's not as bad as it sounds, because to rescind coverage means to take it away retroactively. Employers can still end coverage prospectively, or going forward."
Private employer health-care plans subject to the Employee Retirement Income Security Act (ERISA) also need to pay attention to ineligible dependents. "ERISA's exclusive benefit provision says the plan is to operate for the sole benefit of eligible participants. There are penalties under the tax code for failure to do so, not the least of which is losing the tax-preferred status of the plan," Priga says.
"If it's a fully insured plan and the company allows ineligible dependents and knows about it, a case for insurance fraud could be made," Peters says. "The third-party insurer could claim fraud and ask for its money back. That's part of why the fraud requirement is necessary to prevent rescission due to an honest mistake."
For publicly traded companies subject to Sarbanes-Oxley Act regulations, knowingly or unknowingly covering ineligible dependents could be considered a reportable incident to shareholders.
Lisa Hooker is a freelance writer.
Reprinted from the March 2011 issue of Columbus C.E.O. Copyright © Columbus C.E.O.