Dependent Eligibility Audits: Self-Awareness for the Self-Insured
By EMILY RHOMBERG, a senior manager in the LECG-SMART Compensation & Benefits group, who brings more than 15 years of insight on employee benefits, executive compensation and change management
Self-insured employers, who bear the risk of the medical costs of employees, have begun to more regularly employ dependent eligibility audits to help contain and reduce healthcare costs.
According to employers and providers of the service who have released data, overall healthcare costs can be reduced by 7 percent to 12 percent per year or more by deploying the same disciplines as a financial statement audit to uncover dependents still covered under medical insurance who no longer meet the established eligibility criteria.
The practice of employing auditing best practices, in conjunction with an integrated employee communications plan and practical knowledge of healthcare benefits plan and regulatory provisions, is gaining broader acceptance by employers and their health insurance carriers alike. The financial benefits for employers and their employees are clear: real-dollar savings achieved immediately.
A dependent eligibility audit yields benefits both for employers and their employees. While a dependent eligibility audit requires up-front planning and time, it can bring significant benefits to all involved. Employers yield immediate, tangible savings by removing ineligible dependents from an employer's health plans.
The majority of ineligibles removed from the census fall into the categories of either former spouses or dependent children over the age of 19.
Employers in a fully-insured medical plan benefit too. The cost of insuring the population falls to the carrier, but savings to the employer can be found primarily through reduced premiums paid to the insurer (although the savings are less significant in this scenario).
Employees save money year over year through both lower premiums offered by employers and the employer's ability to retain some desirable plan design features because of the savings achieved by removing ineligible dependents.
VALUE BEYOND COST SAVINGS
Additional benefits to employers who choose to employ dependent eligibility audits on either a one-time basis or on regular intervals include:
-- IRC 401 "Exclusive Benefit Rule": The plan sponsor must act to ensure that health plan dollars are used for eligible expenses and must act solely in the interest of participants and their beneficiaries. These individuals can be liable if they knowingly pay claims for ineligible dependents.
-- ERISA: Plan documents must include dependent eligibility provisions. By covering ineligible dependents, group administrators risk violating ERISA's requirement that the plan be operated according to the established document and could face fines and additional administrative burdens.
-- Section 125 Pre-Tax Contributions: The IRS allows for pretax dollars only for employee contributions for qualified cafeteria plans and beneficiaries. Allowing for pretax deductions for unqualified or ineligible dependents and beneficiaries could subject the employer to penalties, taxes or plan disqualification.
-- Sarbanes-Oxley Compliance: The management team of a publically held employer is required to both assess and report the effectiveness of its internal controls over its financial reporting. Because healthcare is a significant expense, companies are conducting dependent eligibility audits to demonstrate clear financial controls and anti-fraud provisions.
WHY THE AUDIT APPROACH MATTERS
While such audits can be an incredibly valuable tool, if not properly executed, a dependent eligibility audit can spell employee-relations disaster.Executive level buy-in and visible support are the key elements of a successful implementation. Other important components of the process include:
-- A holistic employee communications strategy, which identifies the purpose of the audit and the benefits to both the employer and employee population.
-- Inclusion of an amnesty period, which allows employees to self-report any known eligibility violations and removal from coverage, without negative consequences, before the audit begins.
-- A clear understanding of the plan document and procedures, and the definitions of eligible dependents.
-- A solid data repository, which can be utilized to maintain the required documentation to substantiate each type of eligible dependent.
-- A central source for employee questions and follow-up, which provides consistent and clear communication to employees.
WHO PERFORMS THE AUDIT?
Dependent eligibility audits can be performed internally, through the insurance provider or through a third-party service provider. Given the sensitive nature of the information often required to be submitted for dependent eligibility substantiation, a third-party provider is often selected for their independence, objectivity and subject-matter expertise.
These eligibility audits are generally conducted on a one-time basis, where the entire dependent population is reviewed over a period of weeks.In addition to this one-time process, we recommend that procedures are implemented to both require documentation upon initial enrolment of dependents and to conduct sample audits periodically. Both of these changes will improve the overall compliance with the plan document and continue to help prevent unnecessary costs.
We also recommend that employers look for providers whose approach includes a comprehensive review of the current dependent eligibility management processes and procedures to identify potential vulnerabilities in current procedures. These vulnerabilities can then be addressed in the audit.
In addition, look for a provider that ensures knowledge transfer throughout the process, resulting in updated documentation and procedures that can then be utilized to prevent future exceptions.
January 1, 2010
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