With health care costs continuing to rise, many employers are turning to their health plans to find ways to cut costs. And one way to do so is to make sure that your health plan covers only those who are eligible, which can result in significant cost savings. Most employers do not like to hear the word audit, but a dependent eligibility audit can save a business a significant amount of money on their employee benefits, says Craig Pritts, a sales executive with JRG Advisors, the management arm of ChamberChoice.
“The objective of a dependent eligibility audit is to identify dependents who are not eligible to be on the health plan,” says Pritts. “Those can include dependents who have exceeded the age limit that allows them to be covered, divorced spouses or even friends, roommates or other relatives who are not eligible.
It is estimated that between 3 percent and 15 percent of dependents on an average plan are not actually eligible for coverage. And just one ineligible participant can have a substantial impact on a health plan, depending on the costs of their claims.
Smart Business spoke with Pritts about how performing a dependent eligibility audit and removing ineligible dependents from a health plan can translate into significant cost savings for employers.
Why should employers consider performing a dependent eligibility audit?
ERISA includes stringent eligibility rules for plan sponsors, and employers need to ensure that all plan documents, including the summary plan description (SPD), are consistent when defining dependents. A dependent audit helps ensure that you are in compliance with ERISA by providing benefits only to eligible participants.
It is recommended that plan documents be amended to reflect the process that will be followed in determining dependent eligibility going forward, i.e., frequency of audits, the verification process, potential penalties, etc.
One important factor to remember is the rule for dependent children based on the 2010 Patient Protection and Affordable Care Act (PPACA). For all plan years beginning on or after Sept. 23, 2010, children can be considered dependents until age 26, regardless of marital status and student status.
What are the steps to performing an audit?
There are typically two steps to performing a dependent audit. First, employers should establish a period of amnesty during which employees can voluntarily remove ineligible dependents from the plan with no penalty. The most common way of doing this is to notify employees of eligibility rules in writing so that they can review the status of covered dependents. Employers generally give employees one month to notify them of ineligible dependents they may have on the plan. Ineligible dependents that are voluntarily removed are then terminated from the plan at the end of the following month.
Second, for all dependents remaining on the plan after the initial amnesty period, employers should require employees to provide documentation to verify the dependent status/relationship and to confirm that such a relationship still exists. Examples of required documentation could include marriage certificates, domestic partner affidavits, birth certificates, adoption papers, tax forms, etc.
If an employee is unable to show proof of a dependent relationship — or declines to do so — the employer may impose penalties, terminate coverage or seek reimbursement for claims that were paid for dependents during the time in which they were deemed to be ineligible. While employers typically do not seek disciplinary action as a result of the initial audit, this is an option.
Many cases of dependent ineligibility are the result of oversight, such as forgetting to remove a child when that child reaches the maximum age limit, but other instances, such as failing to remove a former spouse, or stepchildren who live elsewhere, can be intentional and can be a serious issue to the employer. The health plan’s ability to provide for its intended beneficiaries is significantly compromised when ineligible dependents receive benefits.
Who should conduct the dependent eligibility audit?
Many employers choose to hire an independent firm to conduct an audit. This can be done on a risk-sharing basis, in which payment to the firm is based on the percentage of recovered amounts or estimated savings as a result of the removal of ineligible dependents from the plan. Using an outside firm can help your business with your employees’ perception of the independence and objectivity of the audit and make them less suspicious of the company gathering what they may perceive to be private information.
For a smaller employer who chooses to perform the audit internally, this may result in additional work but the potential savings can be worth the time and effort exerted to do so. It is important to weigh your company resources against the potential payoff of cost control and ongoing risk exposure when determining if a dependent eligibility audit is right for your company.
Talk to your benefits advisor to learn more and determine if a dependent eligibility audit is right for you. Because as many as 15 percent of dependents enrolled in a plan may not actually be eligible, spending money on an audit could prove to be an investment that saves your company a significant amount of money.
Craig Pritts is a sales executive with JRG Advisors, the management arm of ChamberChoice. Reach him at (412) 456-7253 or Craig.firstname.lastname@example.org.
Insights Employee Benefits is brought to you by ChamberChoice
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.