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You've Got Dependents? Prove It


This year, many Americans are rummaging through attics and safe deposit boxes to track down essential documents for reasons that have nothing to do with the taxman. Yes, they're preparing for an audit, but this one is being performed by their employer.

"Dependent eligibility audits," in which companies demand proof that spouses and children qualify for medical benefits, are swiftly becoming both fashionable and financially rewarding for companies frantic to curb the runaway costs of health coverage. Companies such as Boeing (BA), General Motors (GM), and American Airlines (AMR) have been asking workers to send in marriage licenses, birth certificates, student IDs, and tax returns. The goal: to cull the benefits rolls of ineligibles, which could include ex-spouses, stepchildren who live elsewhere, or 29-year-old college grads still being claimed as dependents. In the last year, the number of benefit audits "has just exploded," says Watson Wyatt (WW) human resources consultant Susan Johnson.

At best, the audits are a device that can save millions in an employer's health-care costs, keep premiums down for legitimate beneficiaries, and catch outright fraudsters. At worst, employees who believed their family members' coverage was unassailable may discover they're out of luck. In some workplaces, morale suffers, too. "Employees really don't like to be asked for this stuff," observes Johnson. "They feel like What's next?'"

Employers are willing to risk upsetting workers because of a confluence of challenging trends. They've tried just about everything to stem the rise in health insurance expenses, including mandatory wellness programs, penalties for smokers, and higher co-pays. Meanwhile, morphing family dynamics--high divorce rates and blended families--have helped lead to more ineligible dependents. Audits are finding up to 15% of those claimed as dependents aren't entitled to coverage.

Even those whose dependents are eligible may have to work hard to prove it. Take Ed Lutgen, a union shop steward coordinator in Seattle, who spent the last five months battling benefits bureaucrats at Boeing, where he worked for 10 years. Though he's a noncustodial parent who divorced 16 years ago, Lutgen says Boeing had never questioned the eligibility of his son, now a high school student, who had been covered since birth. In June, a letter warned him that without proof of dependency the son would be ineligible. A 2006 tax return showing his son as a dependent was not enough to satisfy the auditors, though a copy of his old child support order finally nailed down the coverage. "There might be some people gaming the system," he says, "but why should I have to show them all of this...when they've known about the boy since the kid was born?" Boeing spokesman Tim Neale, unfamiliar with Lutgen's case, says "we are doing everything we can to be fair" by allowing beneficiaries to appeal.

The services auditors sell often have a distinct law enforcement ring. Some consultants refer to audits as DEAs and use names like Plan-Guard to underscore the defensive nature of their services. "Amnesty" programs are also popular; companies urge employees to come forward voluntarily, without consequences, if they're covering people they shouldn't. "It's basically a get-out-of-jail-free card," explains Brennan Clipp, senior vice-president for sales and marketing for HRAdvance, which conducts audits, including one for The McGraw-Hill Companies (MHP), parent of BusinessWeek.

CHEATERS BEWARE

At many companies, missing the deadline for sending in paperwork risks having a dependent's coverage dropped. Still, there are usually appeal windows of up to 60 days during which coverage can be reinstated if employees show proof. A few companies, however, are getting tough on those who procrastinate or are caught signing up an unqualified person. Some have made employees wait until the next open enrollment period before reinstating insurance if they repeatedly missed deadlines. Clipp says one client even fired workers discovered to have enrolled ineligible people because they violated its stringent code of conduct.

The audit craze also has given life to consultants that companies pay to identify dependents who aren't what they seem. Howard Gerver, founder of Franklin Lakes (N.J.)-based HR Best Practices, says he uses proprietary software he calls the "Brain"--Benefits Reconciliation and Insurance Negotiator--to deliver lists of suspect dependents to clients such as Dress Barn (DBRN), the women's clothing retailer. The software, he says, might flag employees with too many children too close in age, which could indicate ineligible nieces, nephews, or other children.

Such aggressive moves are partly a response to employees who cheat the system--to save money or, consultants say, from a sense of entitlement. That has prompted a number of surprises during audits. In New Jersey, benefit-plan sleuths uncovered one employee who tried to enroll 83 dependents. A 25,000-employee California hospital with unusually generous rules found some workers had even claimed neighbors as dependents.

Audit firms say companies are often surprised by the savings. While a large company's audit might cost $20 to $30 per worker, the average annual health-care cost is about $3,000 per dependent. Goodyear Tire & Rubber (GT), for instance, trimmed 13% of its 70,000 dependents, due to ineligibility, in its 2005 audit, saving 6% on costs. "It was well worth the effort," says Tom Broderick, compensation and benefits director.

Such culling is meant to help companies and workers alike lower costs, though workers may not always understand how they benefit. Auditors say many employers fail to communicate the savings. Lutgen, the Boeing veteran, has his own thoughts about what happens: "It never trickles down."

By Keith Epstein and Jena McGregor


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