Hidden costs Featured

8:00pm EDT October 26, 2009

In response to current market conditions, many organizations are paying increased attention to carefully managing balance sheets in an effort to remain competitive or, in some cases, viable. Companies are taking steps to free up capital and cut costs while also trying to keep their work forces engaged and productive.

In that climate, many employers are finding that health care programs present a cost reduction opportunity, as it’s their fastest-growing business expense.

One way to reduce those costs is to make sure that you are only paying for dependents who meet the company’s eligibility guidelines for group medical benefits. Conducting a dependent eligibility audit not only helps reduce your overall costs but also avoids shifting those costs to your employees or, for public entities, to taxpayers.

Smart Business spoke with Candice P. Mill, senior vice president with Aon Risk Services and chief operating officer of the Health and Benefits Practice in Pittsburgh, about how to save money by conducting dependent eligibility audits.

Why should employers conduct audits?

For the past 30 years, most plan sponsors operated on the honor system when newly hired employees added dependents to group health coverage and other employee benefits. However, with the financial pressures of our current economy and health care costs continuing to increase at double-digit rates, employers are motivated to look to other options to reduce costs.

A variety of federal compliance requirements, such as Sarbanes-Oxley and ERISA, have also prompted employers to conduct audits on dependents.

What are the potential savings in health care plan costs as a result of conducting a dependent eligibility audit?

On average, each dependent costs an employer $3,400 annually, and employers who conduct audits typically find 4 percent to 6 percent of dependents who are not eligible for benefits.

Ineligible dependents cost employers 5 percent to 10 percent more in dependent health care costs, and companies report a return on investment averaging from 10-to-1 to 25-to-1 or more.

While the audit itself is a one-time opportunity to voluntarily remove dependents who should not be covered under the medical plan and realize savings within four to six months, it should also be a natural part of an organization’s health care strategy. By implementing a long-term plan, employers can make sure proper controls are in place for future new hires, life events and annual enrollments to prevent the buildup of ineligible participants. These controls can ensure a maximum return on the organization’s benefits investment and help sustain long-term savings.

What are the reasons dependents are found to be ineligible?

A variety of factors contributes to ineligible dependents covered on the employer medical plan, but the most common reasons are inconsistent, or a lack of, internal eligibility processes and procedures; poor communication about eligibility requirements; multiple acquisitions and divestitures, leading to multiple plans and eligibility criteria; or a shortage of internal HR resources to manage and/or conduct periodic audits of dependent eligibility.

Consequently, dependents who don’t meet the eligibility requirements set forth by the plan sponsors include overage dependents, such as children who are no longer students; stepchildren following a divorce of the natural parent; extended family dependents under no legal guardianship; and unmarried partners with no recognized relationship under the plan or children of live-in partners with no legal relationship.

What are the steps to conducting an audit?

The first step is to get executive management buy-in. Obtaining management buy-in is critical. Presenting the facts about how HR is helping to drive cost reductions, improve legal compliance and promote operational excellence establishes the business case for investing in an audit and also helps to advance the brand perception of the internal HR team.

The second step is arranging options for those removed from the corporate plan. The most successful tactic to combat negative perceptions of an audit is to create coverage options for dependents who are removed.

The third step is to overcommunicate. Employers should communicate the mutual benefits of controlling health care costs for employees and the organization, such as money to invest in research and development, training, etc. The communication campaign should contain a personalized notification letter that includes:

  • Explanations on the purpose of the audit, guidelines to protect confidentiality, the name and experience of the company hired to conduct the audit, and information about the call center that will answer questions about the audit
  • Information on which dependents are eligible and a list of the individuals currently enrolled under the employee’s coverage
  • A list of valid documentation needed to verify all dependents, such as a birth or adoption certificate, marriage license, etc.
  • A clear statement of the consequences of keeping ineligibles enrolled that emphasizes the benefit of arranging for proper coverage through other insurance to avoid claim denials with no recourse to other coverage after expenses have been incurred

The fourth step is involving a third party whose core business is the administration of eligibility. This ensures the process includes best practices (such as offering health options for those removed) and adds a layer between you and your employees that can help allay concerns about confronting employees about the legitimacy of their dependents.

Candice P. Mill is senior vice president with Aon Risk Services and chief operating officer of the Health and Benefits Practice in Pittsburgh. Reach her at (412) 263-6387 or Candice_P_Mill@aon.com.