Tony Schy May 13, 2010

Now that HHS has provided a first round of guidance for the implementation of the dependent coverage provisions of Health Care Reform, new questions emerge.

Question #1: Do the changes negatively impact the expected results of a dependent audit?

The short answer is “yes,” but it is important to consider the size of the impact and the net results after the changes. An average dependent costs a group health plan $2,800 per year. Conservatively, most employers can expect to drop 5% of total dependents. So, for a group with 1,000 dependents, they could expect to drop 50 dependents for an average savings in the first year of $140,000. If the group health plan had a traditional definition requiring an adult child up to age 23-25 to be full time students, up to 40% of the total drops could be students. This reduces the number of dependents that, on average, would be removed to 30. However, while students represent 40% of the drops from a population perspective, they are roughly half as expensive as an average dependent. So while you would lose 40% of the drop count, you would only lose 20% of the savings. The group with 1,000 dependents would thus save $112,000 instead of $140,000. If the dependent audit cost $30,000, this would still produce and ROI of 273%. Not a bad return when cash in your local bank’s savings account earns 1/4%

Question #2: Should I wait until 2011 to implement my dependent audit?

Here, the short answer is “probably not.” The savings from a dependent audit is actually reoccurring year after year – though it diminished over time due to attrition and natural circumstances. Waiting until 2011 will have a real cost in terms of delayed savings that can never be recouped. Using the same 1,000 dependent group health plan above, the annualized monthly savings is $9,333. Thus, every month a dependent audit is delayed eliminates up to $20,000 in savings that could be achieved with earlier implementation. If you were contemplating a 6 month day, this could be $56,000 in lost savings. A good analogy would be if you could save $50/month by installing a new high efficiency air conditioner in your home. Every month you delay your decision to install the new AC, you continue to pay the extra $50. And you can never get the $50 back.

Question #3: If I implement a dependent audit right now, how should I account for Health Care Reform?

For this, there are two options. First, you could follow suit of many major national insurance companies and implement the changes that you are required to implement in 2011 (assuming a Jan 1 plan start date) sooner vs. waiting. If you take this option, then you should consider implementing a program to ensure that the adult children on your plan do not have coverage available to them from their own employer. No other changes to a typical dependent audit would be necessary. Second, you could implement the audit based on your rules as of today – with no changes based on Health Care reform. If you are an ERISA self-insured plan, you still have an obligation to manage your plan as designed and for the exclusive benefit of the plan participants. This is a strong argument for continuing to operate your plan as it is designed today. There is also a concept called status quo bias that you should consider. By ensuring that you keep your plan tightly managed today, you will help ensure that you continue to only offer coverage to dependents that are truly eligible under the new rules.