It’s time for the employees of Rutland Regional Medical Centerto put their paperwork where their hearts are.

The hospital, in Rutland, Vt., is in the midst of a dependenteligibility audit, designed to ensure every employee family memberwho receives health coverage from RRMC is actually eligible it.

Every employee, from CEO to chief surgeon to janitor, must showcopies of their marriage certificates, children’s birthcertificates, and the first page of their most recent tax returns,with numerical amounts blacked out, to demonstrate they’re marriedand legally the parents of any children they claim as dependents onthe hospital’s health plan.

“We’re in this market of continuing escalating health carecosts. We need to contain costs and still offer a competitivebenefits plan. This is a good way to make sure we’re offeringcoverage to the right people,” says Allison Wollen, the hospital’svice president of human resources, who helped decide on andimplement the audit.

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

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

“We found people who had aged out, former spouses, and folks whoweren’t guardians of dependents any more,” Wollen says. It’sdifficult to know exactly how much care an employee dependent mightuse in a year, but $3,000 is a commonly stated ballpark figure. Atthat rate, the audit saved the University of MassachusettsHealthcare System/Health Alliance Hospital $1.2 millionannually.

Popular with employers

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

“It’s absolutely critical that employers have accurateeligibility and don’t incur expense where it’s not warranted," saysPatsy Grooms, COO of North America Administrators LP, based inNashville, Tenn.

The audits have the potential to create significant savings, asthe University of Massachusetts Healthcare System/Health AllianceHospital’s audit demonstrates, and can also serve as an opportunityto remind employees of just how valuable their benefits planis.

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

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

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

The good, bad, mistaken

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

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

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

“They might be your domestic partner’s child, or yourgrandchildren born to your dependent children,” Kelly says. Auditsfind people employees haven’t really married, as well as peoplethey’ve married and then divorced. Sometimes a divorce settlementincludes a court order that one former spouse provide the otherwith health insurance, but an ERISA plan doesn’t have to supportcourt-ordered insurance provision.

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

Some workers might genuinely be in the dark about theireligibility violations. Others have made a mistake, forgetting toremove a child from the company plan when she turns 26, forinstance, or neglecting to tell the company when a foster childreunites 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 systemthey can,” says Howard Gerver, founder and president of HR BestPractices, a benefit consulting firm, and Predixion, adata-modeling firm, both of which are based in Wayne, N.J. “Youmight find people who quietly pay an ex less in alimony but keepthat 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 stricterhiring procedures and employ workers with more to lose.

Big for self-insureds

Dependent eligibility audits can prevent pain at fully insuredcompanies—but they’re particularly critical for self-insuredfirms.

Ineligible plan participants don’t typically cost a fullyinsured company big bucks, though their high medical expenses couldmean higher premiums for a business.

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

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

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

Cost-benefit analysis

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

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

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

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

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

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

Maybe his Facebook status shows that he’s single, or he has anaccount on an online matchmaking site. Data modeling assigns ascore indicating how likely it is that the employee has ineligibledependents enrolled on the company plan. The firm decides how fardown that list it wants to go, working from the greatest to theleast likelihood of hitting pay dirt.

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

Managing reactions

Whether a company uses a full audit or a more targetedassessment, 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, andmight even feel vaguely accused of dishonesty, even if noaccusation 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 anegative influence on employee morale unless you do it reallyproperly,” Starkman says.

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

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

Companies might do this during open enrollment, giving a graceperiod for people to come forward if they’ve made a mistake. Remindpeople of the rules and give them a chance to come clean, free ofthe chance of disciplinary action or the possibility that anemployer will try to recoup claims costs or premiums, Kellysuggests.

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

Some firms simply ask employees for an affidavit stating thattheir dependents are legally theirs. But Kelly advises against thispractice.

“Certification isn’t terribly effective, though they’re a loteasier because they don’t involve collecting information. Peoplewho are going to lie will lie regardless, and if they’re alreadylying to you there’s no reason that they’ll stop now. Validationaudit is much more effective. You want to see paperwork,” hesays.

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

In that case, RRMC’s Wollen says, none of their dependents areeligible for benefits, no matter what their actual legal statusmight be. If an employee has deliberately added false dependents toa company plan, Kelly says simply, you may want to fire thatperson.

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

“That sweetens the deal,” he says. As for Rutland RegionalMedical Center, Wollen reports that employees are largelycooperative and understanding.

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