Ineligible Dependents Drive Up Health Benefits Costs

Employers can save a significant amount of money on their health benefits costs simply by checking if their employees’ dependents are eligible for coverage, shows a research paper from Colonial Life & Accident Insurance Company, in partnership with the Government Finance Officers Association (GFOA).

Up to 8% of the dependents enrolled in an employer’s medical plan are actually ineligible to receive benefits according to their plan’s own criteria, the study, “Controlling health-care costs with dependent eligibility audits,” found.           

The paper cites research from the Kaiser Family Foundation and Mercer, which says employers pay an average of $3,500 annually to provide coverage for a single dependent. “At this rate, employers can rack up big price tags in a hurry by funding dependents who aren’t qualified for coverage,” Colonial Life notes.

In addition ineligible dependents subject employers to increased legal exposure. There is heightened compliance risk associated with paying claims for ineligible dependents, which is prohibited by federal law. Also, ineligible dependents assume they have coverage they don’t actually have, which can create unpleasant surprises when they eventually learn the truth.

The recent Colonial Life-GFOA study examined 17 local governments that conducted audits in 2013. The average number of ineligible dependents across all 17 governments was greater than 7%. The five largest jurisdictions reviewed (which ranged from 3,500 to 7,500 employees) would be able to save between $590,000 and $1.3 million annually by removing the ineligible dependents.

The paper notes the benefit of a dependent eligibility audit stretches many years beyond the first-year savings, since the employer will not have to pay future premiums for those ineligible.

According to the paper, 60% 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 Patient Protection and Affordable Care Act) are also part of this 60%, often having inadvertently remained on a parent’s health plan past eligibility.

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

Practitioner experience with dependent eligibility audits has revealed a number of characteristics that the organizations most likely to benefit often share, the paper says. These include:

• A loose process for bringing in new employees and poor communication of benefit eligibility rules (e.g., the employer does not collect documents from new hires when adding them to the plan and/or does not clearly explain the rules to new employees);
• Jurisdictions that are governed by complicated labor contracts, and more adversarial relations between management and organized labor. Such environments may impede the clear communication and understanding of eligibility rules to employees;
• The employer has not performed a proof-based audit in the past, or has not taken steps to make sure that ineligible dependents did not enroll in the years since the audit; and
• The employer does not collect documents from employees after life-changing events (e.g., marriage or the birth of a baby).

The research paper outlines the process for conducting a dependent eligibility audit. It can be downloaded here.