Health Plan Dependent Eligibility Audits Are Crucial for Cost Savings

Organizations are struggling on multiple fronts in the current economy. On one hand, there’s the challenge of delivering business results amid consumer retrenchment and a credit crisis, while on the other there’s the pressure to manage rising health care costs and claims, which threaten profitability and stability for many companies.

In this unprecedented confluence of events, firms are understandably interested in the cost-saving potential of health plan dependent eligibility audits, which are designed to verify the eligibility of dependents covered by an employer’s health plan. In fact, since 2006, the number of Mercer-conducted audits has more than doubled every year, with more growth expected this year amid a dramatic rise in the number of inquiries from companies seeking to add these audits to their arsenal of recession-fighting weapons.

The immediate and long-term savings gained from these audits can be substantial. Based on several years of experience conducting audits, Mercer conservatively estimates that 3 to 8 percent of covered family members (spouses and dependents) cannot produce valid verification of eligibility during an audit. This can translate into significant costs for employers, with $1,900 being the average annual cost of providing health coverage for one dependent, according to an estimate based on data from Mercer’s National Survey of Employer-Sponsored Health Plans. The accompanying chart (Figure 1) shows that the cost savings from conducting an audit can vary significantly, depending on the percentage of dependents who are ineligible and a company’s actual cost for each one.

Indeed, employees who cover their spouse under their company health plan should be able to provide proof of relationship through a marriage certificate, a domestic partnership statement or affidavit, or other documents a state may require. Dependent child coverage may be documented by birth certificates, legal adoption or guardianship papers, as well as by verification of full-time student status for unmarried children who are beyond the age of non-student childhood dependent eligibility (usually age 19). However, it is important to note that the purpose of a dependent eligibility audit is not to exclude spouses or other legitimate dependents on the basis of technicalities, but to discover any dependents who truly are not eligible.

Some employees, with no intention of running afoul of their health plan’s eligibility rules, may not even be aware that they have ineligible dependents on their plan. Others may view eligibility audits as an intrusion into their private lives and an effort by the company to disqualify as many health plan lives as possible for the sake of saving money. But the truth is that plan sponsors have a fiduciary duty to administer their health plan only—and rigorously—in the interest of eligible participants and their eligible dependents. This is known as the “exclusive benefit” rule. By not complying, employers risk running afoul of federal requirements as well as the Internal Revenue Code—in addition to spending money on nonqualified participants. Such negative outcomes can be avoided by the careful management of dependent eligibility.

And so, as companies look to manage expenses in the current economic climate, more and more are acknowledging that monitoring dependent coverage equates to sound financial and fiduciary management. But doing it well is a process that involves strategic planning, detailed employee communications and summary reporting. Because of the obvious employee relations challenges posed by an eligibility audit, dependent audit service providers such as Mercer offer call center support and an intuitive employee Web site to help educate and support employees throughout the eligibility confirmation process. This approach helps ensure that dependent audits are as fair and effective as possible, while also helping to educate employees about the rules surrounding eligible dependents and the cost of care.

There’s no question that auditing dependent eligibility can be a cost-saving opportunity for organizations that have, for whatever reasons, failed to do so before now. And although employees may initially view the audits as an intrusion into their personal lives, with prudent planning and communication, determining eligibility will be seen more clearly for what it is—a tool that may help buoy the bottom line by ensuring fairness and correctness of coverage.

Dependents in plan	Estimated ineligible %	Average cost per dependent per year*	Potential savings per year
10,000	3%	$1,900	$570,000
10,000	4	1,900	760,000
10,000	5	1,900	950,000
10,000	6	1,900	1,140,000
10,000	7	1,900	1,330,000
10,000	8	1,900	1,520,000

* Employers should consider their own cost per dependent when calculating their potential savings.