Exams for Health Plans

To rein in health coverage costs, employers are checking up on the efficiency of their plans.

By Jan 1, 2005
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HR Magazine, January 2005As health care costs keep rising, human resource managers keep looking for ways to restrain the increases without sacrificing the quality of employees' coverage. Among the cost-containment tools HR can deploy are health plan reviews. Two of the most common are design reviews and eligibility audits.

Design reviews examine a plan's overall structure to assess how cost-effectively it serves a particular company's workforce, how it compares with competitors' plans and how it can be improved.

Eligibility audits identify participants who should be removed from the rolls because they no longer qualify for health plan benefits. These audits can lead to savings not only by purging the ineligible, but also by generating reimbursements from employees for the payment of erroneous or fraudulent claims and by lowering premiums and administrative costs for plans whose fees are based on the number of enrollees.

Neither type of review is required by law, but both make good business sense, experts say, for several reasons. First, proactive changes to medical, dental and pharmacy benefits plans can trim inefficient or wasteful health expenses. That in turn can help employers afford a level of coverage necessary to attract and retain employees. "You need to ensure you're competitive with your coverage," says Nancy Astorga, vice president of compensation and benefits at Navy Federal Credit Union in Vienna, Va.

Reviewing your health plan can also demonstrate a company's broader corporate financial responsibility, experts say. "Having the right processes and controls is as important as having the right numbers" on the audited annual statements filed with the federal government on health plans' financial condition, says Lale Iskarpatyoti, director of HR services in the Philadelphia office of PricewaterhouseCoopers LLP. "We're being asked more and more to look at health plans as part of the audit process." (For summaries of other types of reviews, see " One Must-Do Audit...." and "... And Some Optional Reviews, " elsewhere on this page.)

The Big Picture

A review of a medical plan's design is aimed at determining which short- and long-term strategies will work best for the employer. The goal is "to get the highest amount of employee satisfaction for the lowest cost," Iskarpatyoti says.

For short-term solutions, the review can examine details such as whether co-payments and out-of-pocket maximums should be changed, and it can explore major questions such as whether to increase the number of health plans offered to employees. It can analyze the feasibility of offering newly available health savings accounts and examine whether a consumer-directed health plan should be an option-or even the only option-for employees. (Consumer-directed health plans are designed to reduce health outlays by giving employees more responsibility for the dollars they spend on health care.)

A plan design review can also help an employer decide whether to consider long-term strategies such as wellness-promotion efforts and disease-management programs. "We're trying to lay out a game plan," says Bill Sharon, a senior vice president in Tampa, Fla., for the health and welfare practice of Chicago-based Aon Consulting. For example, an employer may want to figure out how to save 5 percent in the first year, then map out further changes for the next three to five years, Sharon says.

The savings from plan design reviews vary widely, depending on the extent of changes made and the fee paid to outside consultants who conduct the reviews. Consultants who work with large employers say they charge $10,000 to $200,000, depending on the number and complexity of the employer's health plans and the extent of research involved.

Design reviews proceed in various ways. Iskarpatyoti works internally to see how well a plan has met goals, and he analyzes claims data to identify the main cost drivers. Sharon, on the other hand, looks for comparisons with what other businesses are doing. "We start with the network and the discounts," he says. "If they're not as strong as those in the marketplace, we look at changing."

It's a strategy that has been successful, Sharon says. "Because health care costs have been going up at double-digit rates, employers have been pretty active at making changes. We typically find lots of opportunity for improvement at every company we look at."

Cost-cutting trends in health plans, according to benefits experts at Watson Wyatt Worldwide, an HR consulting firm based in Washington, D.C., that works with large employers on health plan design, include reducing the number of health maintenance organizations offered and shrinking provider networks, which can reduce administrative costs and remove the least-efficient providers. Other trends include raising co-payments for office visits and establishing spousal surcharges-the surcharges levied on employees who choose to have spousal coverage when their spouse has coverage available under his or her own employer's plan.

Sometimes, however, trade-offs must be considered. For example, squeezing deeper discounts from medical providers saves employers money but irritates hospitals and doctors, who may then decline to accept the employer's insurance. Switching to a lower-cost network can cut employers' costs but could also force some employees to change doctors or pay more for out-of-network doctors.

And in some instances, a review can result in additional benefits. Midmark Corp., a manufacturer of medical and dental equipment in Versailles, Ohio, added long-term care insurance-an employee-paid benefit-to its cafeteria plan at employees' request, says Mickey Scherer, vice president of HR. "We look at the plans every year. Are they meeting the needs of our employees?" she says. The self-insured company has 700 U.S. employees, most of them enrolled in two preferred provider organizations.

Assessing the Results

Like many employers, Navy Federal Credit Union, a $22 billion institution, reviews its medical plan every year. About 3,200 of its 4,300 employees are enrolled in health plans. Its employer/employee cost-sharing ratio is 75 percent to 25 percent, it is self-insured, and its health coverage costs are about $19.5 million per year.

An insurance broker helps with the analysis, Astorga says, and major changes have been made recently as a result. Last year, for example, the credit union reduced costs by $500,000 after overhauling its prescription drug program. For 2005, the institution added a third provider network, which is expected to produce savings of up to $500,000 per year through provider discounts, Astorga says. The organization also instituted a disease management program, which will produce long-term savings through improved management of chronic diseases.

Although Navy Federal doesn't make such dramatic changes with every health plan review, the practice doubtless contributes to its ability to manage costs. "We feel like we've been pretty successful," Astorga says. "We've kept our cost increases below the national average." The organization's health care costs rose just 5 percent in 2004 -- significantly below the 12.3 percent increase, for example, that HR consulting firm Hewitt Associates, based in Lincolnshire, Ill., calculated from its database of more than 2,000 health plans with more than 18 million participants.

In a review of plan design, the features and numbers examined-from provider networks and discounts to premiums, deductibles and co-payments-can be benchmarked against those of organizations that compete with the company for talent, a review typically undertaken every two to three years. Through their work with various clients, consultants come to know at least in general the levels of health coverage costs paid by various types of companies.

For example, plan audits enable Navy Federal to compare its health benefits with those of banks and call centers in the Washington, D.C., area every other year, Astorga says. The institution also looks at the federal government's and local governments' health plans.

Rooting Out Ineligibles

Most employers do large-scale plan reviews every three or four years, with other types of reviews in between, Sharon says. One such review is the eligibility audit.

Eligibility rules, set out in health plan documents, generally allow employees to enroll themselves, their spouses, dependent children up to age 18 and children who are full-time college students up to age 23 or 25.

Through forgetfulness or, less often, fraud, employees sometimes don't tell HR about a divorce, a college graduation or other event that makes a spouse or a dependent ineligible. As a result, a third-party administrator (TPA) continues to pay claims for those people.

Eligibility audits aim to right the wrongs and update employers' records. The first step is usually HR's-sending every employee a copy of the health plan's eligibility rules and a list of covered dependents to check on. Most employers allow an amnesty period of 30 to 90 days, during which employees can remove ineligible beneficiaries from the rolls without penalty. After the deadline, employees who haven't corrected the records may face discipline, even termination.

"Given the opportunity to do the right thing, [most] people will," says Michael Watson, vice president of sales at Budco, a Highland Park, Mich., company that conducts eligibility audits for major corporations.

After the amnesty period, all enrolled employees are asked to bring in birth certificates, marriage licenses, college records or other documents to verify the status of their dependents. Those who do not meet the plan's eligibility criteria are dropped, and workers are notified.

Navy Federal, which conducts eligibility audits every three years, always finds "a few that have fallen through the cracks," says Astorga. She adds, "We've terminated people that falsified their applications for health insurance."

Eligibility audits typically remove at least 5 percent of the names on the rolls and thus can reduce costs substantially. Such savings go straight to the bottom line, not just for self-insured employers that see a drop in their payouts for medical claims, but also for insured companies whose premiums and administrative costs decline as their number of enrollees declines.

Eligibility audits cost $7,500 or more. Budco's Watson says, "The typical savings are more than tenfold what the cost is."

The Process of Purging

For eligibility audits to succeed, HR must handle them in a way that prevents employee perceptions of a broad-scale crackdown.

Successful eligibility audits start with good communications with employees, says MaryAnne Watson, vice president of claims auditing services at the Segal Co., a New York-based benefits consulting firm. She advises HR managers to explain that rising medical costs have prompted the employer's desire to keep both the company and its workers from paying more than necessary for their health coverage.

Iskarpatyoti says: "This is not just an issue for the employer. Health care coverage is a shared cost. Employees pick up 30 percent to 50 percent of the cost of covering an ineligible person."

When Philadelphia Gas Works, a municipal utility, conducted an eligibility audit in 2003, employee reaction "wasn't as bad as you'd expect," says Bill Ambrose, director of HR administration, "because employees are more conscious of what health care costs." The utility gained employee acceptance of the audit by getting buy-in from the labor union that covers 70 percent of its 1,750 employees, he says.

Philadelphia Gas removed about 5 percent of the names on the rolls of its four health plans and recovered almost $100,000 in past payments of claims for ineligible enrollees. "It was a major undertaking," Ambrose says of the three-month audit, which it conducts internally every two years. The company spends $27 million on medical care annually for 1,600 active employees.

Employers are within their rights, and may recover large sums, if they ask employees to pay at least some portion of back premiums and claims for dependents found to be ineligible. But many don't do so in the interest of employee relations, says Mark Rucci, vice president at Niis/APEX, a Princeton, N.J., health care consulting firm.

Iskarpatyoti says: "The critical thing is to handle situations consistently. There needs to be a policy." Philadelphia Gas told all employees, even those who removed ineligible people during an amnesty period, that they had to pay back any company-paid premiums and expenses from the date of ineligibility or face termination. Since then, Ambrose says, employees have come forward quickly after a divorce or other disqualifying event. "People are more aware of what the requirements are."

After the Audit

Regardless of whether an eligibility audit leads to recovery of unwarranted payouts, it can save money by heading off future premium and claims payments for ineligible beneficiaries. The key for employers is to keep records current by asking new enrollees for proof of eligibility, reminding current employees to make any necessary changes, and keeping TPAs and other firms up-to-date.

"The worst thing to do is to spend a lot of money on an eligibility audit and then not follow through with your vendors," says Segal's MaryAnne Watson.

"If you continue to do this on an ongoing basis, it puts teeth in the audit process," adds Budco's Michael Watson. "We like to audit 20 percent of the [employee] population on an ongoing basis."

It's clear that HR professionals can save their companies substantial sums by initiating reviews of health plan design and participant eligibility, provided the efforts don't stop when the audit is finished. If it's a plan design analysis, it won't be worth the cost unless its recommendations are considered for adoption. If it's an eligibility audit, it will come up short if it's not communicated effectively to employees and not implemented when the results are in.

Carolyn Hirschman is a business writer based in Rockville, Md. She has written for a variety of business publications and has covered workplace issues since 1991.

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