Overseeing Audits of Your Health Plans

Due to a prolonged economic downturn, a sputtering recovery and comprehensive health care reform, employers are facing pressure to ease financial strain by changing their health care benefits. HR professionals and benefits leaders are looking for ways to relieve the stress by conducting plan audits and design reviews.

“We have absolutely seen an upswing in all types of audits,” says Bruce Caputo, national audit practice leader with the Chicago office of Towers Watson. His company’s audit volume grew 10 percent from 2008 to 2009.

Even before health care reform was enacted in March, many business leaders expected to revise their health care programs. In total, 83 percent of companies have changed or plan to change their strategies, compared with 59 percent in 2009. New strategies include stepped-up audits, Caputo says, pointing to results from a January survey of 507 U.S. employers, each with 1,000 or more employees, by Towers Watson and the nonprofit National Business Group on Health in Washington, D.C.

Findings show that 69 percent plan to conduct eligibility or enrollment audits this year, compared with 61 percent in 2009 and 55 percent in 2008. Eligibility audits identify plan participants, such as divorced spouses or adult children, who should be purged from the rolls because they no longer qualify for benefits. Enrollment audits then reconcile eligibility data with official records.

Medical claims audits and clinical audits are also becoming popular, with half of employers either conducting them or planning to conduct them, according to a 2009 Aon Corp. survey of 1,300 senior HR leaders and benefits managers at companies of all sizes.

The motivation is clear, notes Thomas Lerche, senior vice president and health care practice leader for the consulting firm in Chicago: Because many employers essentially hand their checkbooks to third-party administrators, auditing those administrators is sound business practice. “Audits have become a popular tactic to reduce program costs—with vendor payments contingent on the amount of savings,” he notes. In other words, the auditor gets paid based on the savings identified.

Fresh Trends Emerge

Indeed, protection and prevention are new themes among auditors as HR and benefits professionals strive for precision in managing health plans.

For example, more employers are conducting pre-implementation audits, experts say, as a way to catch potential problems before rolling out a plan design.

The method essentially acts as a “test run” whereby sample claim scenarios for each plan option, benefit and limit are processed and adjudicated to make sure they correctly interpret plan provisions—and to avoid costly systemic errors before the plan goes live, Caputo says.

“Prevention is worth a pound of cure”—and pre-implementation audits prove that, he says.

Another trend involves putting guarantees in place to ensure that vendors meet employers’ clinical and financial goals, says Dean Hatfield, senior vice president and health practice leader of Sibson Consulting in New York.

One type of performance guarantee subtracts penalties for unacceptable service from vendors’ payments—and therefore also reduces plan providers’ costs. For instance, an employer can establish a guarantee to be reimbursed for the cost of time and expense needed to correct inaccurate claims payments or to complete an on-site audit of a claims office with numerous errors.

According to the 2009 Aon survey, 53 percent of employers plan to negotiate these types of performance guarantees with thirdparty administrators or insurers, thereby encouraging vendors to reduce the need for expensive audits down the road.

Another type of performance guarantee rewards vendors for positive results, Hatfield says. A common method reserves a portion of the vendor’s premium or administrative fee until after a yearend performance assessment. The results determine whether the vendor has earned the entire amount or a portion of the money.

Such guarantees are becoming the standard now, and the structure is “even richer and tougher,” he says, noting that the penalty for problems is typically twice as much as the incentive for doing well.

The bottom line: “The deeper you get with this, the more you’ll rise to the top of their attention level, which is where you want to be” with vendors, Hatfield advises.

Not Just a Quick Fix

Audits may be sparked by events such as:

• Compliance obligations.
• Major plan changes.
• A new plan administrator.
• Unexpected utilization trends.

HR and benefits professionals conduct such audits to drive longer-term health plan objectives or to receive immediate, shortterm returns or a one-time recovery of funds. Michael Thompson, principal of PricewaterhouseCoopers’ global human resource solutions group in New York, says employers are focusing on value in their health plan audit practices and looking for opportunities that deliver savings. “They’re challenging the effectiveness of existing health management programs and, where appropriate, seeking to redirect investments in areas of more value.”

Plan design audits, for example, examine a plan’s structure to assess how cost-effectively it serves the workforce, how it compares with competitors’ plans and how it can be improved.

As reported in the Society for Human Resource Management’s 2010 Employee Benefits survey report, 79 percent of respondents said their organizations review their benefits programs annually and 10 percent reported reviewing them even more frequently. Only 1 percent said their companies never conduct such reviews.

At the same time, the recession’s impact has led to morefrequent revamps of plan design. Compared with responses in 2009, more respondents this year indicate significant increases in point-of-care cost sharing in medical and pharmacy plans through higher deductibles, co-pays and co-insurance rates, according to the Towers Watson survey. An even greater number of employers are planning to take such steps in 2011, the data suggest.

Audit Shapes Plan Design

Like many employers, Navy Federal Credit Union, a $40 billion institution based in Vienna, Va., reviews its medical benefits every year. About 75 percent of its 7,100 employees are enrolled in a health maintenance organization (HMO) or a preferred provider organization (PPO) network. The employer pays 80 percent of health plan premiums, and health coverage costs are about $60 million per year before employee contributions. An insurance broker helps with the annual analysis and major changes have recently been made as a result of reviews, says Nancy Astorga, vice president of compensation and benefits.

Last year, for example, the credit union saved $6.5 million after reducing the number of PPO networks from three to one. The one chosen—the Blue Cross nationwide network—provides much deeper discounts.

Navy Federal also added a $100 out-of-network deductible and a $50 deductible for nongeneric prescriptions. Pricing for the HMO option was aligned with the PPO health plan to drive coverage decisions based on delivery of care rather than the cost of coverage per paycheck. Those alterations were effective in shifting enrollment from the credit union’s fully insured HMO plan to its self-funded PPO plan. The changes are expected to save more than $7 million annually.

“We want employees to make their health coverage choices based on how they want their health care delivered and by whom—not on the per-paycheck cost,” Astorga says.

Although Navy Federal doesn’t make such dramatic changes with every health plan review, the regular audits almost certainly contribute to managing costs.

“We’ve kept our cost increases below the national average,” she says. The organization’s health care costs decreased 13 percent from 2008 to 2009 and are projected to rise only 1 percent in 2010—an enviable percentage.

Plan audits enable Navy Federal to compare its health benefits with those of banks and call centers in its region every other year, Astorga says. And, she looks at federal and local governments’ health plans for comparison. “We make incremental changes to ensure that employees have ‘skin in the game,’ ” she adds, “and share in the cost of the health care choices they make—or neglect to make.”

Challenging Existing Plans

Financial reviews have been a popular way to focus on the cost drivers of health plans that have been trending at higher rates. Employers are also taking a fresh approach to audits to propel health-improvement goals.

At Andersen Corp., a 10,000-employee window and door manufacturer based in Bayport, Minn., benefits leaders recently used an avoidable-claims analysis to discover what was driving double-digit increases in health care costs.

Many costs were related to preventable conditions, says Kathy Prondzinski, director of corporate benefits design.

That analysis led to the hiring of a full-time health-improvement program manager, the creation of a comprehensive wellness program, a stronger focus on consumerism in health benefits choices and a new medical plan vendor.

After the first full year of its plan design changes, executives saw a decrease in per-employee health care costs and a 13.5 percent reduction in employee health risks. In 2006—before the changes took place—annual health care costs per employee in the self-insured plan were $8,586. In 2007—after the changes— that figure declined to $7,843, Prondzinski says.

“Dig into what your data are telling you,” she advises. “There’s always value.”

Prondzinski says lower plan costs delivered bottom-line savings during a decline in the housing industry. It was one of several “rings of defense” leaders implemented to preserve financial strength, sustain medical coverage for the long term and reinforce the company’s commitment to employees’ health.

Managing the Process

Many employers use outside benefits consultants and auditors to conduct various types of health plan audits. HR professionals’ involvement typically occurs at the beginning and end of the process.

Medical claims audits, for example, require employers, thirdparty administrators and insurers to collect and make available for review documents and financial information. Eligibility audits require a current census of employees with enrolled dependents, a full plan description, and communication and education campaigns advising employees of pending audits and required verification.

Following these steps, auditors typically take control of the analysis. Once results are complete, it’s up to HR and benefits leaders to take appropriate actions based on the findings, explains Mark Rucci, senior vice president of audit services at Healthcare Analytics, a division of Gallagher Benefit Services Inc. in Itasca, Ill.

“It makes no sense to do an audit and not make changes,” he says. The service employees get is related to audits and how well employers stay on top of vendors after findings are shared and enforced.

Weighing Costs and Merits

Returns and savings from audits vary widely, as do fees. Depending on company size and the complexity of the health plans, consultants quote fees ranging from $10,000 to $150,000 for eligibility and claims audits. For employers with few workers, however, certain types of audits can cost as little as $20 per enrollee.

The payoff? Before health care reform legislation was implemented, auditors estimated that an average 3 percent to 8 percent of enrolled employees’ dependents would be ineligible. Assuming a $1,900 average annual cost per dependent, savings can be substantial: Plans with 3 percent ineligibility per 10,000 dependents would save $570,000; those with 8 percent ineligibility might net a return of about $1.5 million. But keep in mind that under health reform, some previously ineligible adult children will now remain covered until age 26.

While compliance and cost-effectiveness rank high on the list of reasons to conduct regular health plan audits, Rucci reinforces their basic worth: “The value of an audit is not always measured in recovered dollars.” Audits certify, through independent assessment, that vendors are doing a good job for the employer, he says. “Getting a clean report back is the best evidence of your management and due diligence.”

Web Extras

• Slow Payments: Not Your Problem? (HR Magazine)
• Health Care: Tips for Auditing Dependent Eligibility (SHRM Online Benefits Discipline)
• Dependent Eligibility Audits Impacted by Reform Law (SHRM Online Benefits Discipline)
• Selecting An Auditor for Your Employee Benefit Plan (U.S. Department of Labor)