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Dependent Health Care Audits Become ‘a Hot Topic’

August 18, 2008
Related Topics: Benefit Design and Communication, Health and Wellness, Latest News
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A growing number of employers have launched dependent health care audits as a relatively painless effort to reduce health care costs.

General Motors Corp. announced last week that it was auditing its 80,700 hourly workers and 345,000 retirees in an effort to reduce the more than $4.6 billion it spent on health care last year. This follows a just-completed audit of its 36,600 salaried workers and 97,400 retirees.

Dependent audits are “very much a hot topic,” said Mark Rucci, a Princeton, New Jersey-based consultant with Gallagher Benefit Services Inc. “The employers are at least discussing it. If they’re not doing one now, many of them are planning to do it within the next couple of months.”

A survey released in March by Arlington, Virginia-based Watson Wyatt Worldwide found that 55 percent of 453 large employers plan to conduct a dependent audit this year, and 74 percent said they plan to do so next year. This compares with the 42 percent that conducted audits in 2007.

Observers say dependent audits discover that, on average, 2 percent to 12 percent of dependents on health care rolls are ineligible. Depending on the generosity of the plan and the average age of the employee population, among other factors, culling ineligible dependents from the rolls can save $2,000 to $5,000 annually per employee, observers say.

Ineligible dependents are generally on the rolls because of ignorance or negligence rather than fraud, observers say. Ineligible dependents are often ex-spouses and children who have either “aged out” or have dropped out of college, and are therefore no longer eligible to receive benefits.

Observers stress the importance of employers introducing follow-up procedures after an audit to prevent ineligible dependents from slipping back onto their health care rolls.

The audits are becoming increasingly popular. A GM spokeswoman said the automaker is conducting its first full-scale audit after carrying out others on a much smaller scale in the past.

“We have seen, probably, a 500 percent increase just in inquiries and proposal requests from 2007 to 2008,” said Brennan L. Clipp, senior vice president of sales and marketing with Dallas-based HRAdvance Enterprises, which provides audits.

Keith Bird, vice president of sales for Suwanee, Georgia-based Impact Interactive, which conducts audits, said he attributes the increased demand to better-educated employers. “Plus, obviously, health care costs are continuing to increase,” he said.

John Fazio, a Cleveland-based senior consultant with Towers Perrin, said the primary factor driving the trend is employers’ “need to make sure they have explored every area to manage their plans as efficiently as possible” and to exercise their fiduciary responsibility.

Under the Employee Retirement Income Security Act’s exclusive-benefit rule, an employer’s health plan must be for the exclusive benefit of a firm’s employees or their beneficiaries. This means employers have a fiduciary responsibility to remove ineligible dependents, said Wayne K. Soud Jr., executive vice president with Lockton Cos. in Atlanta.

Furthermore, the Sarbanes-Oxley Act requires that companies maintain controls to ensure appropriate use of company funds, said Joel Carter, vice president of client services at Newport Beach, California-based Secova Inc., a human resources and benefits administration outsourcing company.

Observers say the percentage of ineligible dependents on employers’ health care rolls has remained fairly consistent over time, despite rising health care costs. It will vary from firm to firm, though, depending on factors that include the plan’s generosity and how much of the premiums are paid by employers.

GM employees and retirees will have until Wednesday, August 20, to self-report ineligible dependents, who will then be removed from the company’s health care rolls with no repercussions. In the next phase, employees and retirees will be asked to provide documentation—such as tax returns or school transcripts—to prove their dependents’ eligibility for coverage.

The GM spokeswoman said employees may be asked to compensate the company for coverage provided to ineligible dependents discovered during this second phase.

Employers generally follow the same route of offering employees an amnesty period followed by a request for supporting documentation, observers say.

However, employers that seek reimbursement or terminate employees who are discovered to have ineligible dependents are still relatively rare, observers say.

The vast majority of employers “simply want to remove the ineligibles,” HRAdvance’s Clipp said.

In some cases, employers plan to seek reimbursement, but in the interest of employee retention and attraction they do not communicate it, consultant Rucci said.

“Why alienate everyone?” he asked.

Follow-up is critical, observers say.

“If you do a one-time audit and do nothing else, our studies show in three years you’re right back where you started,” Secova’s Carter said.

In some cases, the very same people whose ineligible dependents were removed from the health care rolls will try to get them back on during the next open enrollment period, Rucci said.

“Employers need to put in place procedures to keep track of dependents that are already disqualified and not let them back on the rolls unless they can prove a change of circumstances,” he said.

Filed by Judy Greenwald of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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