Fighting Fraud: #1 Way Employees Abuse Employer Health Insurance

Written by Joanna Morrow

Joanna Morrow, Principal and Founder of Employer Benefits & Advice, is an employer consultant and advocate who has worked in the employee benefits industry for over two decades. She works diligently to help employers overcome obstacles in their business by sharing her expertise in Human Resources, Benefits & Compensation, Process Mapping, Risk Management and ERISA/DOL/IRS compliance. She is a licensed life and health insurance professional in the State of Arizona and is an active member of the National Association of Health Underwriters (NAHU).

Fighting Fraud: #1 Way Employees Abuse Employer Health Insurance

With health care costs continuing to rise, many employers are looking for additional ways to cut costs. Making sure your health plan covers only those who are eligible can be a significant cost saver. How can you do this? A dependent eligibility audit may be an option.

Employers should recognize that proportionate to the dwindling individual health insurance market in Arizona is the unfortunate but growing incentive for employees to cover ineligible dependents via your often more attractive and comprehensive employer-sponsored medical plan.

Estimates are that between 3% – 12% of covered dependents on employer-sponsored plans are not actually eligible. To help rein in costs and prevent abuse, in recent years more and more employers are implementing dependent verification (DV) programs, which aim to ensure that ineligible persons are not enrolled in their health plan as dependents.

For employers with large populations of employees insuring dependents, here are answers to some of the most frequently asked questions:

How do we go about conducting a dependent verification audit?

Typically there are two steps to a dependent audit, as outlined below:

Employers establish a period of amnesty when employees can voluntarily remove ineligible dependents without penalty. Employees are notified by letter, explaining eligibility rules. An employee can then review all covered dependents for status, and no penalty will apply to those dependents removed due to ineligibility.

Employers generally give employees one month to respond. Ineligible dependents who are voluntarily removed by employees are terminated at the end of the following month.

For all remaining dependents after the initial amnesty period, employers should require employees to provide documentation to verify dependent status/relationship. Documents must establish both a dependent relationship and that the relationship still exists. Examples may include:

  • Marriage certificates
  • Domestic partner affidavits
  • Legal documents that establish custody, guardianship or foster care
  • Birth certificates
  • Tax forms
  • Medical documentation of disability
  • Adoption papers

What happens if an employee can’t prove that someone is an eligible dependent?

If an employee is unable to establish a dependent relationship, the employer may impose penalties, terminate coverage, or seek reimbursement for claims paid for ineligible dependents. It is not typical for employers to seek out disciplinary action as a result of the initial audit. Some employers also offer an appeals process to give those deemed to have ineligible dependents (or non-respondents) a chance to reinstate their children or spouses.

If we discover an ineligible dependent, can we terminate their coverage retroactive to the date they were first added to the plan?

The health care reform law limits an employer’s ability to retroactively remove ineligible dependents from coverage. Under the law, a rescission (or retroactive cancellation of coverage) is permissible only if the individual obtained coverage through fraud or an intentional misrepresentation of material fact and the individual is given at least 30 days’ advance notice of the rescission. An employer can avoid the law’s restrictions on rescissions by canceling coverage on a prospective basis.

If an ineligible dependent is removed from the employer plan, is he/she eligible for COBRA?

Disenrollment may not be a COBRA qualifying event, but an employer may choose to offer COBRA to all, not just those that are truly COBRA eligible as a result of the audit. Self-insured plans should get permission from their stop-loss carriers and insured plans should get permission from their insurers before offering COBRA coverage to all ineligible dependents removed from coverage.

Also, an employer may need to retroactively adjust employee W-2s for those employees who made pretax contributions for an ineligible dependent. For this reason, some employers choose not to seek reimbursements for past claims, but simply to deny coverage to ineligible dependents going forward.

How do we properly notify employees of dependent eligibility rules and requirements?

It is recommended that plan documents be amended to reflect the process that will be followed in determining dependent eligibility going forward, such as frequency of audits, verification process at the point of new employee enrollment and penalties.

Who is the best person at the company to oversee a dependent audit?

Many companies choose to hire an independent audit firm. This can be done on a risk sharing basis where payment is based on the percentage of recovered amounts or estimated savings. Using an outside firm can also help with employee perception of the independence and objectivity of an audit. In addition, the auditing process can be cumbersome and time-consuming, so larger companies may find that a third-party auditor is more practical.

What can I expect to pay for a dependent audit?

Although pricing models vary across vendors, the typical structure usually involves a one-time engagement fee, then a fee per initial letter sent out notifying employees of the audit, then additional fee(s) for a follow up and/or confirmation letter which are usually optional, but recommended.

So a common fee structure may look like this:

  • Initial Engagement Fee: $900 – $1,000
  • Initial Letter to Employees: $15 – $20 per letter (sample here)
  • Follow Up Letter (for employees who do not respond to the initial letter): $5.00 – $7.00 per letter
  • Confirmation Letter: $5.00 – $7.00 each

It is important to weigh your company resources against the potential payoff of cost control and ongoing risk exposure when deciding whether a dependent eligibility audit is right for your company. Think of it this way… even if an audit saves you 3 or 4 hospital stays by dependents who should never have been enrolled in the first place, the cost of an audit will have been well worth it.

Which employers are most at risk for abuse?

Public sector employers, and private sector employers employing large family populations and/or making sizable contributions toward the dependent premium are at the greatest risk for abuse. Even if you choose not to conduct a formal dependent audit there are a number of low or no cost activities employers can perform to deter fraudulent behavior by employees.

If you would like to learn more about these and other tactics aimed at reducing costs contact us at 602-903-4047.