Health care costs for all industries have increased between 120 to 130 percent over the last decade. In 2010 alone, costs increased by 8 percent. Dependent eligibility audits have become important tools for businesses to utilize to ensure the employees and dependents on their plan are eligible participants and to also ensure compliance with requirements such as ERISA and Sarbanes-Oxley.
“If you can’t afford to cover an employee because you have ineligible people on your health care plan, you’re not going to be able to attract great, new talent to your business, because everyone wants health care coverage,” says Jenny Harmon, CPA, director, GBQ Physician Practice Group. “If you can’t provide good benefits, your talent pool will become limited.”
Smart Business spoke with Harmon about the key components of a dependent eligibility audit and how health care reform has affected audits.
What is a dependent eligibility audit?
A dependent eligibility audit determines which members of your health insurance plan are actually eligible. Certain requirements must be met to be eligible for a health insurance plan, such as being an employee or a dependent. The employer sends notices to its employees and has to show that the people currently covered are eligible.
Situations like divorce, common law marriage and overage or part-time students result in ineligibility for previously eligible people.
Why should an employer conduct an audit?
Larger companies, or companies that undergo regular financial audits, have to ensure compliance with Sarbanes-Oxley. They have to show there’s no misappropriation such as fraud or theft with their assets.
ERISA, which governs health insurance plans, only allows coverage for people who are ‘eligible.’ The employer can define what ‘eligible’ is – but there may be problems if the employer covers people who are ineligible, or if the policy discriminates.
For example, you may unknowingly be covering Suzie’s common law husband when you’re not supposed to be, or her 29-year-old son, because no one’s ever kicked him out of the plan — and you may have declined to cover another person’s 29-year-old son.
Dependent eligibility audits are especially important for self-insured employers, because of their additional responsibility.
What are some key things business leaders need to understand about these audits?
Communication is key during an audit. Don’t just send out a letter telling employees to provide documentation — you need to educate employees on eligibility rules. Sometimes, you can provide amnesty: employees can turn themselves in and fix everything.
The average cost per dependent is $3,000 to $5,000 in a self-insured plan. Most audits find 4 to 12 percent of dependents currently on a plan shouldn’t be covered. So employers actually end up with a cost savings.
How can you prepare for an audit?
The logistics of asking everyone to prove that they are actually married, have children who cannot get insurance elsewhere, or have a handicapped child who is eligible for continued coverage from their plan are a lot of work. The volume of information is huge. Set up a call center where employees can call in and ask questions. If you have 1,000 employees, it’s smarter to do that externally. A 100-employee company may be able to manage it internally, but has to worry about complying with HIPAA and other privacy policies.
For a 1,000-employee situation, one of these plans typically costs $6,000 to $8,000, and you will probably make that back times four in claims and premiums. It’s better to have someone else have that responsibility than try to do it internally.
What impact has the Health Care Reform had on dependent eligibility audits?
The biggest thing is, there are now ‘theoretically’ fewer ineligibles. You have to provide the opportunity for dependents up to age 26 to be on your plan, whether they do or do not live with an employee, are still in school, etc. It’s opened up the opportunity for coverage to expand to more people. You will have fewer ineligibles, and it also added a component where you can’t discriminate for the cost — a dependent is a dependent, up to age 26.
Before health care reform, you could retroactively bill employees or cancel their insurance if you found out their dependent was ineligible. You can’t do that anymore. Unless you can prove that they fraudulently signed that person up, you can withhold coverage from this day forward. The fear was, if you kept someone on for six months after a divorce, and all of a sudden that person had a huge car accident resulting in many claims and the insurance company or self-insured plan paid the resulting bills, once the person was found ineligible the insurance company would request repayment from the doctors and hospitals making the self-insured plan or the employee responsible for the bills.
What are the risks and benefits associated with dependent eligibility audits?
The biggest risk is lack of communication with employees as to why this is happening. Before, many companies were sending out an affidavit form that listed who was on their insurance, and employees just had to sign off that all of these people were eligible.
It’s also a major privacy risk. If you ask questions about an employee’s spouse, especially in a plan that might cover same-sex and common law partners, do you really want to know that information?
The largest benefits are compliance with ERISA and Sarbanes-Oxley requirements, covering who is supposed to be covered, and controlling costs. If you’re self-insuring a plan, and remove just two ineligible dependents from your plan, you’re saving money and eliminating risk of any costly health issues that might arise with that dependent.