Controlling health-care costs with dependent eligibility audits.

Author:Mack, Mark
 
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Dependents represent a large portion of the cost of many employers' health plans, but how many of those enrolled dependents are legitimately eligible for health coverage benefits? The answer is fewer than you think. One might assume that ineligibility is a matter of extraordinary circumstances, but the internal audits of an increasing number of public and private sector organizations are proving otherwise. The bottom line: Ineligible dependents are probably costing your government money.

Studies suggest that roughly 8 percent of dependents enrolled in health-care plans are ineligible for coverage. (1) The City of Corpus Christi, Texas, was surprised to find that 9 percent of dependents covered by its plan were technically ineligible for coverage. These cases cost employers an average of roughly $3,500 a year per dependent, so identifying them is an economic imperative. (2) Conducting a dependent eligibility audit (DEA) saved Corpus Christi more than $1 million in the first year alone.

The central task of dependent eligibility audits is to verify the eligibility of each dependent claimed by an employee. DEAs are a particularly helpful health-care cost-containment strategy because it does nothing to erode the quality of the health-care benefit. After the audit, qualified plan members still receive exactly the same benefits, and their out-of-pocket cost does not increase. Further, unlike many other cost-containment strategies, DEAs are straightforward and expedient; they can be accomplished in a matter of months.

While DEAs are relatively common in the private sector, they appear to be more rare among local governments?

WHO IS INELIGIBLE?

Since dependents (as a category) often make up the majority of lives covered by an average health-care plan (see Exhibit 1), identifying them can have a significant financial impact.

Sixty percent of ineligible dependents enrolled in an employer's health plan are children. The most common reason a child is found to be ineligible is that the employee is not the legal guardian of the child (e.g., a stepchild or a grandchild who lives with the employee). Older children who have passed the eligible age (now 26 under the Affordable Care Act) are also part of this 60 percent, often having inadvertently remained a parent's health plan past eligibility.

Spouses, who are typically the heaviest users of health benefits, make up the remaining 40 percent of ineligible dependents. The most common reason for spousal ineligibility is divorce, where the ex-spouse was never removed from the health plan.

Spouses, who are typically the heaviest users of health benefits, make up the remaining 40 percent of ineligible dependents. The most common reason for spousal ineligibility is divorce, where the ex-spouse was never removed from the health plan.

WHAT IS THE FINANCIAL BENEFIT?

The potential reductions in cost provided by a DEA are obviously substantial. However, two questions must be answered before a conclusion can be reached on the net financial benefit. First, even though substantial savings are available across all employers, how likely is any individual employer to realize savings? Second, how do the savings compare to the costs of performing a DEA?

An important part of the answer to the first question is "the law of large numbers," which holds that as a sample size gets larger, its mean will become increasingly close to the average of the whole population. In other words, larger employers are more likely to have closer to 8 percent of their dependents ineligible, while smaller employers are more likely to experience wider variation (much higher or lower than 8 percent).

To better understand this principle, we examined a sample of 17 local governments--cities, counties, and school districts--that conducted DEAs in 2013. The average number of ineligible dependents across all 17 governments in the sample was 7 percent, which is close to the nationwide average of 8 percent.

The five largest jurisdictions had between 3,581 and 7,507 dependents in the health plan, and the five smallest ranged from 367 to 759. Exhibits 2 and 3 show the details for these two groups. As the tables suggest, the percentage of ineligible dependents are closer to 8 percent for the larger governments, while there is more variation among the smaller governments.

The conclusion...

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