Insurance Fraud in the Workplace? Evidence From a Dependent Verification Program

• Author: Harvey S. Rosen,Michael Geruso
• Published date: 01 December 2015
• DOI: http://doi.org/10.1111/jori.12046
• Date: 01 December 2015

INSURANCE FRAUD IN THE WORKPLACE?EVIDENCE

FROM A DEPENDENT VERIFICATION PROGRAM

Michael Geruso

Harvey S. Rosen

ABSTRACT

Many employers have implemented dependent verification (DV) programs,

which aim to reduce employee benefits costs by ensuring that ineligible

persons are not enrolled in their health insurance plans as dependents. We

evaluate a DV program using a panel of health plan enrollment data from a

large, single-site employer. We find that dependents were 2.7 percentage

points less likely to be reenrolled in the year that DV was introduced,

indicating that this fraction of dependents was ineligibly enrolled prior to

the program’s introduction. There is some evidence consistent with the

notion that these dependents were actually ineligible, rather than merely

discouraged from reenrollment by compliance costs. We find no indication

that the removal of these ineligible dependents spilled over to affect the

enrollment of eligible dependents within the same family.

INTRODUCTION

In the United States, most workers who receive health insurance through an employer

also enroll one or more dependents.

1

A significant fraction of employers’ healthcare

expenditure is attributable not to employees themselves, but to these dependents,

who typically account for about half of the population enrolled in employer plans

(U.S. Census Bureau, 2011). Because employers often heavily subsidize the costs of

insuring dependents, these health benefits can create incentives for workers to try to

Michael Geruso is at the Department of Economics, University of Texas at Austin, Austin, TX

78712. Geruso can be contacted via e-mail: mike.geruso@austin.utexas.edu. Harvey S. Rosen is

at the Department of Economics, Princeton University, Princeton, NJ 08544. Rosen can be

contacted via e-mail: hsr@princeton.edu. We are grateful for invaluable advice to the human

resources experts at the (unnamed) employer whose data were used in this article; to Peter

Perdue for outstanding research assistance; to Janet Holtzblatt, Jonathan Meer, and Katherine

Swartz for useful suggestions; and to Princeton’s Griswold Center for Economic Policy Studies

for financial support.

1

The 2010 Kaiser Family Foundation Survey of Employer Benefits.

© 2014 The Journal of Risk and Insurance. 82, No. 4, 921–946 (2015).

DOI: 10.1111/jori.12046

921

enroll individuals who do not actually qualify for them.

2

Typical employer subsidies

yield thousands of dollars in expected benefits that an employee could exploit by

claiming (say) a niece or a nephew as a child.

3

On the other hand, outside of their

contribution to the premium, the expected cost to employees of falsely claiming a

dependent is about zero—in general, the only consequence of discovery is simply

removal of the ineligible individual from the policy. In short, strong incentives exist to

claim ineligible dependents.

To help rein in costs and prevent abuse, in recent years many employers have

implemented dependent verification (DV) programs, which aim to ensure that

ineligible persons are not enrolled in their health plan as dependents. Typically, DV

policies require employees to present documentation proving the status of

dependents, like marriage licenses for spouses and birth certificates for children.

While almost nonexistent a decade ago, DV programs are gaining popularity. In the

private sector, many large firms have implemented verification programs or

performed dependent audits in recent years.

4

Of the 507 large firms surveyed in

2010 by the management consulting firm Towers Watson (2010, p. 7), 55 percent had a

DV program in their health plan in 2008, 61 percent in 2009, and 69 percent in 2010. In

the public sector, weeding out ineligible dependents has been seen as an easy way to

trim state and local employee compensation budgets. By 2012, at least 38 states had

implemented DV or audit policies for state employee health plans.

5

States almost

universally cite the cost burden of ineligible dependents as the motivating factor.

Do these programs actually reduce ineligible enrollees and the associated costs? Some

anecdotal evidence suggests that they do.

6

But despite such claims, we are aware of no

2

Figures from the Medical Expenditure Panel Survey show that in a typical employer plan, the

average insurance payout for a dependent was around $4,700 in 2010, while the average

incremental worker contribution for enrolling that dependent ranged from $0 to $1,390,

depending on the plan structure (Crimmel, 2011).

3

For the Employer studied in this article, we can make a more precise statement: the average

insurer payment for a dependent in 2009 was $2,780. The incremental cost of adding a

dependent ranged from $0 (if adding an additional child to a family plan) to $2,028 (if moving

from “employee only” to “employee plus spouse” in the most expensive plan).

4

As one news account noted, “‘Dependent eligibility audits,’ in which companies demand

proof that spouses and children qualify for medical benefits, are swiftly becoming both

fashionable and financially rewarding for companies frantic to curb the runaway costs of

health coverage. Companies such as Boeing, General Motors, and American Airlines have

been asking workers to send in marriage licenses, birth certificates, student IDs, and tax

returns. The goal: to cull the benefits rolls of ineligibles, which could include ex-spouses,

stepchildren who live elsewhere, or 29-year-old college grads still being claimed as

dependents. In the last year, the number of benefit audits ‘has just exploded,’ says ‘Watson

Wyatt human resources consultant Susan Johnson’ (Epstein and McGregor, 2007).

5

Source: Authors’ count, primarily tallied from state employee handbooks and web material

available from public employee benefits authorities.

6

According to one news report, for example, “Goodyear Tire & Rubber trimmed 13% of its

70,000 dependents, due to ineligibility, in its 2005 audit, saving 6% on costs” (Epstein and

McGregor, 2007). According to another item, auditors in West Virginia reported that over 8

922 THE JOURNAL OF RISK AND INSURANCE