Do they really belong?

More and more employers are auditing their workforces to make sure their spouses and dependents actually are eligible for healthcare benefits offered through the company.

These so-called dependent eligibility audits have been around for five years or more, but changes in who can qualify for employer-based coverage in the Patient Protection and Affordable Care Act has accelerated employer interest in them, experts say.

Among the changes in the health reform law spurring the audits is the rule that children up to age 26 are now able to stay on their parents' plan, even if they are no longer students. Some states have also enhanced their coverage requirements for adult dependents.

“There's a heightened need now for auditing,” says Michelle Futhey, an executive vice president at global benefits consulting firm Aon Hewitt.

According to the firm's 2010 benefits survey of about 1,000 employers, 48% of respondents already conduct dependent eligibility audits. Another 26% said they are planning an audit for 2011 or beyond. Aon Hewitt has conducted more than 450 dependent eligibility audits for employers in the past four years, involving more than 2 million dependents.

Here's how it works: An employer informs workers that it will be checking to make sure everyone covered by the company's health plan is eligible for enrollment. This notification typically happens about 30 to 60 days before the audit. Employees with dependents and spouses on their health plan must submit documents verifying eligibility. These documents include birth certificates, domestic partnership status and proof that a marriage is still valid, such as joint debts. “You want to make certain that you are giving employees time to respond,” Futhey says.

Then, the auditor combs through the documents to make sure no one who is not supposed to be on the plan has coverage.

Prior to eligibility changes in the federal health reform law, Aon Hewitt found that, on average, 10.7% of all dependents participating in an employer's health plans were ineligible for coverage. Today, post-reform, Hewitt has found about a 2 percentage point rise in eligibility. Now, between 8% and 8.5% of dependents on employer health plans are found ineligible for coverage, according to 2011 trends.

However, though more family members are qualifying for employer-based coverage under health reform, the costs of the ineligibles are higher, according to Aon Hewitt.

“Ineligibles now tend to be older adults and former spouses,” Futhey says. “Before, many of the ineligibles were adult children who were no longer students.”

Older dependents tend to be sicker than dependents in their 20s, she says, driving up an employer's healthcare spending. As a result, the average savings per ineligible after an audit has actually risen.

Today, each person who is covered despite being ineligible costs employers an average of $3,200 in annual healthcare spending. Prior to health reform, the average annual healthcare spending for each ineligible dependent was $2,800.

Employers can save big money by conducting these audits, Futhey says.

“The return on investment is quite staggering,” she says.

For instance, if an employer has 10,000 dependents on its health plan, and 8% of those are ineligible for coverage, costing $3,200 each per year on average, the savings in the first year would be nearly $2.6 million.

Dependent eligibility audits are “a low-hanging fruit” for employers, says Cheryl Larson, vice president of the Chicago-based Midwest Business Group on Health, an employer coalition.

Larson says that even before health reform, the severe recession prompted employers to turn toward auditing. “Members wanted to take $1 million to

$2 million off their healthcare spend right away,” Larson says. “The return on investment for health improvement programs takes much longer. This gives you a spending reduction immediately.”

There's no hard data on how many employers are conducting these audits, says Paul Fronstin, director of the health research and education program at the nonpartisan Employee Benefit Research Institute in Washington.

“I hear this is happening more and more,” Fronstin says. “That's the way trends work in the employer community; there's a herd mentality.”

There's no privacy issue around doing the audits, Fronstin says, so there's little resistance to them from workers or legal entanglements.

Still, employers must tread lightly so workers don't feel they are seen as cheaters, experts say. And no employers contacted for this article wanted to speak on the record about their experience with dependent eligibility audits.

“In most cases where we find ineligibility, it's not fraud, it's a simple mistake,” Futhey says. “Many employees really don't understand the eligibility requirements.”

Some employers build in an amnesty period into their audits. With amnesty, employees can come forward and disenroll ineligible dependents even before the audit begins. Often, this “coming clean” phase is conducted via a telephone hotline.

Some employers have started adding a “spousal surcharge” into their health plan eligibility. How it works is if, say, a wife has health coverage through her employer but chooses to be on the health plan offered by her husband's employer instead, the husband's employer will charge an additional fee beyond standard spousal coverage to put her on the plan. Increasingly, verifying a spouse's employer's health plan coverage is a component of dependent eligibility audits, Futhey says.

Modern Healthcare's 2010 Healthcare Purchasing Power Survey found trends toward spousal surcharges among large employers (Nov. 15, 2010, p. 24).

Beyond private employers, Futhey says she has seen a recent spike in the number of state and local governments conducting dependent eligibility audits to lower healthcare costs.

Another recent trend is an increased frequency in the audits. A few years ago, employers might have done a one-time audit, or conducted one every several years. Today, 35% of Aon Hewitt's audit clients are hiring the firm to do ongoing audits of dependent eligibility instead of one-time episodic audits.

Continuous audits are desired to check new hires, family status changes and dependent additions during open-enrollment periods.

“This trend is evolving very quickly,” Futhey says. “Dependent eligibility audits are just a muscle that many employers have not flexed in the past.”