“Having people on the plan who shouldn’t be on the plan results in higher utilization, and then everyone pays more.” Wollen helped perform a similar audit at her last job, at the University of Massachusetts Healthcare System/Health Alliance Hospital.

That audit, she says, took the list of covered employee children and spouses from 2,100 to less than 1,700, she recalls.

“We found people who had aged out, former spouses, and folks who weren’t guardians of dependents any more,” Wollen says. It’s difficult to know exactly how much care an employee dependent might use in a year, but $3,000 is a commonly stated ballpark figure. At that rate, the audit saved the University of Massachusetts Healthcare System/Health Alliance Hospital $1.2 million annually.

Popular with employers

Desperate to tamp down rising health care costs, many employers are doing dependent eligibility audits: big firms, small firms, government agencies, and even labor unions.

“It’s absolutely critical that employers have accurate eligibility and don’t incur expense where it’s not warranted," says Patsy Grooms, COO of North America Administrators LP, based in Nashville, Tenn.

The audits have the potential to create significant savings, as the University of Massachusetts Healthcare System/Health Alliance Hospital’s audit demonstrates, and can also serve as an opportunity to remind employees of just how valuable their benefits plan is.

But a dependent audit can also greatly irritate employees, sending them rummaging through files and safe deposit boxes in search of paperwork.

Some might feel their privacy is being invaded; others may feel they’re under suspicion for no good reason.

“From an economic perspective, the audit is a good thing,” says Jay Starkman, CEO of Engage PEO in St. Petersburg, Fla. “The reason not everyone jumps to it is that it can be a real morale bummer. Forget about cheaters. People don’t like having to prove they’re honest. What’s more offensive than being told, ‘Prove that’s your child’?”

The good, bad, mistaken

An insurance company might want to do a dependent eligibility audit at a tiny company, as some very small firms fraudulently add non-employees with significant health problems to the benefits rolls. In general, though, these audits make the most sense at firms that are large enough that employees and managers don’t know each other well—more than five or ten people, perhaps.

A typical dependent eligibility audit finds that between 6 percent and 16 percent of dependents are ineligible for the company health plan, says John Kelly, director of strategic partnerships for Ceridian, based in Minneapolis.

The list might include employee children older than 26 and therefore ineligible for their parents’ benefit plans, as well as kids who aren’t legally an employee’s child.

“They might be your domestic partner’s child, or your grandchildren born to your dependent children,” Kelly says. Audits find people employees haven’t really married, as well as people they’ve married and then divorced. Sometimes a divorce settlement includes a court order that one former spouse provide the other with health insurance, but an ERISA plan doesn’t have to support court-ordered insurance provision.

“If your plan doesn’t permit it, it doesn’t matter what your divorce settlement says,” Kelly says. “Employees know they probably shouldn’t do this sort of thing, but they think it might be OK so they sort of let it go.”

Some workers might genuinely be in the dark about their eligibility violations. Others have made a mistake, forgetting to remove a child from the company plan when she turns 26, for instance, or neglecting to tell the company when a foster child reunites with his biological family.

A third group are made up of those simply gaming the system.

“There are people who are scammers and will exploit any system they can,” says Howard Gerver, founder and president of HR Best Practices, a benefit consulting firm, and Predixion, a data-modeling firm, both of which are based in Wayne, N.J. “You might find people who quietly pay an ex less in alimony but keep that person on the benefits plan.”

Gerver says he sees more scammers at firms that have younger, lower-paid employees, a lot of turnover, and/or multiple locations, especially remote worksites.

“You don’t see a lot of scammers at higher-paid organizations,” Gerver says, because such organizations usually have stricter hiring procedures and employ workers with more to lose.

Big for self-insureds

Dependent eligibility audits can prevent pain at fully insured companies—but they’re particularly critical for self-insured firms.

Ineligible plan participants don’t typically cost a fully insured company big bucks, though their high medical expenses could mean higher premiums for a business.

Ineligible participants could also put a fully insured company in hot water with its insurance company or with its employees. “Let's say you have a million-dollar claim. Carriers don't audit small claims that much, but they get interested in a million-dollar claim,” Kelly surmises. “Maybe the carrier asks if that employee is really a dependent—if they’re not, they insurance company won’t cover it, and someone is going to be angry. It can get all kinds of nasty,” Kelly says, adding that lawsuits frequently ensue. A self-insured company, by contrast, takes all the risk and pays all the bills for claims both large and small.

“When you have plan participants who aren’t eligible then you have claims money walking out your door,” says Mack Major, an owner and broker at Higgins Insurance in Hopkinsville, Ky.

Extra risk and direct financial responsibility make dependent eligibility audits particularly important for self-insured firms. RRMC is fully insured, but moving to a self-insured model later this year, after the audit is complete.

Cost-benefit analysis

At small companies, the human resources executive may handle a dependency eligibility audit, simply by making a list of employees with dependents on the company plan, asking for supporting documents, and checking them off as employees bring them in.

At larger firms, however, it’s usually less disruptive to hire an outside firm to perform the audit. In that case, the company’s savings depends on the number of ineligible dependents the auditors find and on how much the audit costs.

“For this to pay out, you need to find people who are both ineligible and using the plan. At some point a full audit costs more than it saves, especially when you find people who are on the plan but not using it,” Gerver says.

Companies with between one and 1,000 employees are better off asking everyone to participate in an audit, Gerver says. Larger companies probably should use predictive data modeling to narrow down their search. Predictive data modeling helps companies narrow their audits to include just dependent children on the company’s plan, spouses, workers at remote offices, or COBRA participants, for instance.

It combines publicly available data with data provided by an employee, then looks to see if the two are in agreement.

“Someone might have family coverage, but other data suggests that he’s single,” says DeWitt M. Smith, owner of DeWitt Consults in Wyckoff, N.J.

Maybe his Facebook status shows that he’s single, or he has an account on an online matchmaking site. Data modeling assigns a score indicating how likely it is that the employee has ineligible dependents enrolled on the company plan. The firm decides how far down that list it wants to go, working from the greatest to the least likelihood of hitting pay dirt.

“Let the data take you to where you want to spend your time and money,” Smith says.

Managing reactions

Whether a company uses a full audit or a more targeted assessment, employees don’t like audits.

“Many people have trouble putting their hands on the documents,” Starkman says.

An even greater number think the request is an intrusion, and might even feel vaguely accused of dishonesty, even if no accusation is intended.

“Sometimes the companies that do this come off like the IRS. It’s a public relations nightmare,” he adds. “An audit can be a negative influence on employee morale unless you do it really properly,” Starkman says.

Doing an audit well, he says, involves using it as an opportunity to educate the work force about “what you’re doing and why,” Starkman says.

“If you couple the audit with an education about the reasons for the audit, the statistics about what these audits end up finding, and the ultimate likely impact on premiums, employees get it right away. You can’t find an employee who doesn’t think the cost of health insurance is too high.”

Companies might do this during open enrollment, giving a grace period for people to come forward if they’ve made a mistake. Remind people of the rules and give them a chance to come clean, free of the chance of disciplinary action or the possibility that an employer will try to recoup claims costs or premiums, Kelly suggests.

Then ask workers who have dependents on the plan for proof that these people are legally their dependents: marriage certificates, birth certificates, and possibly the first page of their most recent tax return, to show that they are still married.

Some firms simply ask employees for an affidavit stating that their dependents are legally theirs. But Kelly advises against this practice.

“Certification isn’t terribly effective, though they’re a lot easier because they don’t involve collecting information. People who are going to lie will lie regardless, and if they’re already lying to you there’s no reason that they’ll stop now. Validation audit is much more effective. You want to see paperwork,” he says.

Workers might feel more comfortable giving documentation to an outside vendor, because it means no one at work will see their private information. Vendors destroy document copies when an audit is complete. A few workers might refuse to give documentation.

In that case, RRMC’s Wollen says, none of their dependents are eligible for benefits, no matter what their actual legal status might be. If an employee has deliberately added false dependents to a company plan, Kelly says simply, you may want to fire that person.

“An employee who lies about this, how can you trust them on anything else?” Don’t ask for the same information over and over. If you got birth certificates for a worker’s children during your last dependent eligibility audit, for example, don’t ask for the same paperwork this time. Finally, Kelly suggests, consider using some of the money you save to increase a benefit, such as dental or vision coverage.

“That sweetens the deal,” he says. As for Rutland Regional Medical Center, Wollen reports that employees are largely cooperative and understanding.

“A few people have called human resources to ask why they have to do this, and 99 percent of them understand right away when we explain the reasons,” she says. “This isn’t a trust issue. It’s about containing costs, and it’s better to try to do this before cutting benefits or laying people off.”