There are indications that employers increasingly are auditing their health plans in an effort to weed out ineligible dependants and lower total costs.

"Audits have taken off in the last 18 months as health care costs have gone up and as boutique firms have come into business specializing in this," says Susan Johnson, senior consultant with Watson Wyatt.

Audits' popularity has been on the rise since General Motors, Ford and other large automakers started doing them a few years ago and proved successful, helping the companies save millions of dollars.

Johnson estimates that employers remove an average of 8% to 12% of dependants after conducting an audit, of which 60% to 70% are children. "If a client does a full comprehensive audit, where they're actually requesting the documentation from the employee ... [then] they're going to achieve a significant reduction in dependants."

Other employers have taken notice, and are beginning to demand the service.

"It's really a hot topic, absolutely. There's a lot of interest in audits right now," remarks Mark Rucci, senior vice president with Gallagher Benefit Services in Princeton, N.J. Gallagher Benefit Services conducted five audits in 2007. Rucci estimates the company will do 10 to 15 this year.

An employer's guide to auditing

Setting up the process and collecting information from the employees usually takes three to four months, says Rucci, and the audit itself usually lasts about 30 days. The expense to employers could be anywhere from $20,000 to six figures, depending on the number of employees and the characteristics of its health plan. For example, two businesses in the same market could have the same number of workers, but one with an indemnity option in its health care plan could pay more for an audit than the other.

On average, Rucci estimates that one dependant costs an employer $2,500 a year. If 5% to 10% of dependants are removed after an audit, savings clearly could be significant.

"These audits almost uniformly pay for themselves," he remarks. "And that's just the first year's savings. How many more years would these dependants have stayed on the rolls? It's really a no-brainer. The return on investment for this process is tremendous."

In terms of where employers should begin their search for an auditor, benefit managers can reach out to their insurance carrier or consultant/broker for advice. Johnson warns that employers should do a fair amount of due diligence to ensure they're getting a legitimate and capable service.

"You have to be very sure whomever you pick has the proper security, because they are handling very delicate information." Auditors need to be mindful of HIPAA and other regulations before they start the process, she adds.

While employers can achieve a significant reduction in costs by eliminating dependants, Johnson stops short of offering guarantees. "We never guarantee something like that," she says. "It depends on how dedicated the employer is on following through."

Once the decision to conduct an audit is finalized, employers should be sure everyone is included, from C-suite executives to entry-level staff. "If this is what we say is going to happen, then you have to make everybody pony up, from the CEO to the guy mopping the floor," Johnson says. "If you don't go through with what you say you're going to do, you can set yourself up for a major liability. That's one of the things we really emphasize. You have to be very straightforward with your communications and stick to them."

Child-only policies

The increase in employers conducting audits seems to coincide with a rise in the number of individuals inquiring about child-only health insurance.

"That is a request that happens in our call center," says Rick O' Connor, vice president of marketing for individual business for Aetna's consumer segment. "There are scenarios where people are between jobs, or where they're at a small company that doesn't offer benefits, or they say, My husband is eligible for benefits, but my child and I are not.'"

Aetna has offered child-only policies through its Advantage PPO plan since 2004; however, the insurer just started actively marketing them in mid-2006. A parent can purchase, for a child between the ages of 2-18, an Aetna Preventive and Hospital Care plan with a $1,250 deductible for $32 a month, O' Connor says. That price, however, is in the low range, he warns, and would likely be higher depending on the state an individual resides in.

"It is a fairly common scenario where people call in and say, I can only afford coverage for one person in the family, and it's going to be my child,' or, My company doesn't offer benefits any longer, but I need to get something for my children,'" says O' Connor.

Rucci acknowledges that, while he doesn't have hard data on the subject, children are often the most likely dependants to be cut from rolls after an audit.

For example, a court could say the father is liable for a child's health insurance following a divorce. If the child lives in another state with his mother, however, the employer doesn't have to provide coverage for the dependant because he doesn't live with the father. An audit would determine if the child is still considered a dependant.