Case study: Using dependent eligibility audits to keep health plans healthy

With medical costs on the rise, employers are looking for ways to maintain their health plans. One important step is a checkup to make sure each plan is being run as effectively as possible. At Milliman, we recommend that plan sponsors "go back to basics" and start with the reason they have a health plan in the first place.

Audits help keep health plans healthy

Employer-sponsored health plans are an important recruiting and retention tool that provides security in the form of medical insurance for workers and their eligible dependents. By keeping employees healthy, organizations expect to improve their productivity and benefit from a more stable workforce. There are also tax advantages, in return for which the regulations assign fiduciary responsibilities to the sponsor of the health plan.

As a fiduciary, the employer is responsible for keeping the plan financially healthy and ensuring compliance with all laws, regulations and the plan’s provisions. One part of the checkup is an audit to make sure that those who are enrolled are actually eligible, particularly with respect to coverage of dependents. Following the plan rules ensures that all participants are treated fairly. Because health plans are established for the benefit of eligible participants, any resources diverted to ineligible persons puts a strain on the plan’s health, to the detriment of eligible participants.

A recent project with a long-time client provides a good case study of the process and possible benefits of conducting a dependent eligibility audit.

Audit began with modest expectations

In early 2008, the client approached Milliman to perform a dependent verification audit, as a way to manage costs within the plans offered and to ensure that every spouse or child enrolled met the company’s definition for eligibility. Before the audit, the client thought it might find 3% to 5 % (at most 8%) of the dependents ineligible.

Milliman worked closely with the company's benefit services group to remind employees of the plan’s eligibility requirements. The audit communications emphasized the need for each employee to review those requirements; they also provided an extensive list of documents that would be accepted as proof of eligibility—and where to obtain them. Employees were warned that, without documentation, their dependents would be removed from coverage.

Honest mistakes add up—to more than $2 million

The results were a bit startling. At the time, the client had approximately 8,000 benefit eligible employees; 75% of these employees had dependents covered in the health plan. At the close of the audit, 1,013 ineligible dependents were discovered and removed from coverage.

Most of these were honest mistakes. It is easy to understand how circumstances can change for employees, and their families, over a decade or two. Typically, it's a case of children growing up and moving out, and the employee simply forgets to update the number of dependents.

Other examples are a bit more complicated. One man had a common-law spouse. Milliman spotted this on a tax return because she was listed as an "other" dependent, which flagged the record for additional documentation. Unfortunately, they lived in a state that doesn't recognize common-law marriages. The client's requirement for covering a common-law spouse was that the state must recognize such unions.

Another unusual example concerned an employee who called to find out why his daughter had been removed from coverage, as she was still under 23 (but not a student, as required). "You let me keep my other daughter on the plan until she was 23 even though she was not a student," he complained. As professionals, we recognize that some employees may never understand the definition of a dependent in spite of all our efforts.

The cost savings were considerable for the client's self-insured plans. Using its estimate of $3,748 in average claims per dependent—and taking into account that the employee pays a portion of the claim funding through payroll deduction—the company will save $2.8 million in claim costs for 2009.

Communication program is key

In planning a dependent audit process, employers should allow sufficient time to plan and prepare data and communications material. While the basic information on eligibility requirements and acceptable documentation is readily available, the audit itself may raise issues at different levels of the organization. Here, good preparation can make all the difference. In the case of this client, Milliman professionals worked with the company's HR team for eight weeks on this phase of the project. Communications focused on three populations:

1. Senior management

Getting buy-in from senior executives is the critical first step. While the primary communication responsibility will rest with HR personnel, the support of senior management is essential for the program to succeed. It should be understood that a small percentage of employees (typically 2% to 3%) will not respond favorably to the audit. Senior management needs to be prepared to answer questions and help overcome objections.

2. HR and plant managers

Because some employees may see the audit as an infringement of privacy or questioning their integrity, it's essential to have managers removed from the actual determinations of eligibility, but at the same time supportive and knowledgeable of the process. Managers needed to understand when the audit would begin, where employees could go for information, how the process would work, their own role, and why the effort was important in the first place.

In this client's case, managers were expected to encourage people to collect their documentation and send it in. However, it was critical that they did not try to advise employees on the prospects for approval or offer to submit documents on their behalf. The company wanted to give managers information they'd need, but also to establish that it is the responsibility of the employees to provide proof of eligibility. Careful attention to these points was made in HR and managers training via four different Webex conferences.

3. Employees

The strategy for communicating with employees may vary depending on the organization. In the case of this client, we determined that multiple contacts would be required and delivered communications to both office and home addresses.

We focused on fairness. The communications explained that the reason the plan exists is to provide insurance for employees and eligible dependents. If ineligible people are receiving benefits, that damages the plan's ability to provide for the people that it was set up to benefit.

To underscore the fairness message, we established a generous amnesty period, during which employees could remove ineligible dependents without penalty. After the amnesty period, a second packet was sent to employees, requesting documentation for listed dependents. Employees returned documentation directly to Milliman, and we verified the relationship and eligibility status.

According to the company's plan, coverage could be terminated if employees did not respond to the request, if they could not provide documentation, or if they did not in fact have a qualified relationship with the claimed dependent. The employer could also seek reimbursement of claims paid for ineligibles. However, it is not typical for employers to pursue disciplinary action as a result of the initial audit. And of course, employees have the right to appeal coverage decisions to the employers according to a predefined process.

A responsible fiduciary

The client's management takes pride in the fact that it has brought its health plan into compliance with ERISA regulations. As the company's benefit services supervisor observes, "A health plan's purpose is to provide insurance for a qualified group of employees and dependents. Companies have a fiduciary responsibility under ERISA to ensure that they are only covering people who are eligible. And, as healthcare costs continue to skyrocket, it is incumbent upon plan sponsors to explore every avenue to keep costs under control."

From an ROI perspective, plan sponsors should note that the company's audit easily paid for itself in the first year. After that, ongoing monitoring and enforcement is key to keeping the eligibility as clean as possible. Once the system is established, it's easy to provide ongoing verification with little incremental cost or effort.