OFFICE

OF THE

NEW YORK STATE COMPTROLLER D IVISION OF LOCAL GOVERNMENT & SCHOOL ACCOUNTABILITY

Wayne County Employee Health Care Plan Trust Participants

Internal Controls Over Dependent Eligibility
2011-MR-2

Thomas P. DiNapoli

Table of Contents

Page AUTHORITY LETTER 2

INTRODUCTION Background Objective Scope and Methodology Comments of Local Ofcials

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INTERNAL CONTROLS OVER DEPENDENT ELIGIBILITY Recommendations

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APPENDIX APPENDIX APPENDIX APPENDIX

A B C D

Response From Local Ofcials Audit Methodology and Standards How to Obtain Additional Copies of the Report Local Regional Ofce Listing

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DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY

State of New York Ofce of the State Comptroller

Division of Local Government and School Accountability September 2011 Dear Local Ofcials: A top priority of the Ofce of the State Comptroller is to help local government ofcials manage government resources efciently and effectively and, by so doing, provide accountability for tax dollars spent to support government operations. The Comptroller oversees the scal affairs of local governments statewide, as well as compliance with relevant statutes and observance of good business practices. This scal oversight is accomplished, in part, through our audits, which identify opportunities for improving operations and municipalities governance. Audits also can identify strategies to reduce costs and to strengthen controls intended to safeguard local government assets. Following is a report of our audit entitled Wayne County Employee Health Care Plan Trust Participants Internal Controls Over Dependent Eligibility. This audit was conducted pursuant to Article V, Section 1 of the State Constitution and the State Comptrollers authority as set forth in Article 3 of the General Municipal Law. This audits results and recommendations are resources for local government ofcials to use in effectively managing operations and in meeting the expectations of their constituents. If you have questions about this report, please feel free to contact the local regional ofce for your county, as listed at the end of this report. Respectfully submitted,

Ofce of the State Comptroller Division of Local Government and School Accountability

OFFICE OF THE NEW YORK STATE COMPTROLLER

Introduction
Background Since 1995, Wayne County (County) has provided their health benets via the Wayne County Employee Health Care Plan Trust (Trust). The Trust originated as a way for the County to provide better healthcare benets at a lower cost to County employees. It was established as a Welfare Trust under Article 44 of the State Insurance Law. The Trust-sponsored plan (Plan) provides a full range of medical, hospital and prescription drug coverage, as well as a dental plan. In January of 2000, the Trust opened participation to the 15 towns, nine villages and various other local governments within the County. Currently, Trust participants (Participants) include Wayne County, the Towns of Savannah, Palmyra, Butler, Rose, and the Wayne County Water and Sewer Authority. The Trust provides benets to these Participants 1,014 enrollees and their 1,149 dependents. The Trust is governed by a Board consisting of three members from the County Board of Supervisors and three union representatives. The Board appoints a Plan Administrator1 to manage the day-to-day operations of the Trust. Participants are responsible for handling the enrollment of employees and their dependents based on the criteria established by the Trusts Board and written out in the Plan documents that are provided to all enrollees. For the 2010 scal year, the Trust had expenses of nearly $11.6 million, or about $1 million in expenses a month. The largest expense for the Trust is the payment of claims. The County Treasurers Ofce acts as a conduit for Trust payments. However, the Trust is self-funded: the Trust collects premiums from Participants, and contracts with a third-party administrator (TPA) to add dependents to (or remove them from) the Plan and to process and pay claims. The Trust also purchases a stop-loss insurance policy to protect itself if claims exceed the amount of premium dollars it collects. Objective The objective of our audit was to determine whether Participants had adequate internal controls over dependent eligibility to
1

The Plan Administrator retired in October 2010 during the course of the audit. An Interim Plan Administrator stepped in immediately following his retirement.

DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY

ensure that they and the Trust achieved cost savings. Our audit addressed the following related questions: Are Trust Participants actively pursuing cost savings by verifying that enrollees are only claiming eligible dependents on their health insurance?

Scope and Methodology

We examined the health insurance related records of the Participants of the Trust for the period January 1, 2009 to March 1, 2011. We conducted our audit in accordance with generally accepted government auditing standards (GAGAS). More information on such standards and the methodology used in performing this audit is included in Appendix B of this report.

Comments of Local Ofcials

The results of our audit and recommendations have been discussed with local ofcials. Although we considered their comments in preparing this report, local ofcials did not provide a formal response to this global report.

OFFICE OF THE NEW YORK STATE COMPTROLLER

Internal Controls Over Dependent Eligibility

In 2010, the County spent over $11 million to provide health insurance benets to employees, retirees and qualied dependents. Given the signicant amount of these expenditures, it is essential that the County and other Participants seek opportunities to minimize the cost of providing benets through the Trust. One way to reduce costs is to ensure that only eligible dependents are enrolled in the Plan. However, we found that no one actually veries dependent eligibility because Participants Boards have not adopted policies that require such verication. Employees are not asked to provide documentation to prove that a claimed dependent meets the Plans eligibility requirements at enrollment or at any time thereafter. Further, the Trust has never conducted an eligibility audit to verify the status of the 1,149 dependents enrolled in the Plan. As a result, ineligible dependents could be receiving insurance benets, which increases Plan costs for the government employers and employees who fund the Trust. Dependent eligibility requirements are determined by the Trusts Board and outlined in the Plan document, which is provided to all Participants for distribution to their enrollees. The Plan document states that the Plan Administrator has the authority to request proof of dependency. Participating employers are responsible for handling the enrollment of employees and their dependents based on the criteria established by the Trusts Board and written out in the Plan document. As of January 1, 2011, dependents covered by the Plan must belong to one of the following categories to meet eligibility requirements: A spouse A child less than 26 years old who is a(n) o o o o biological child step-child adopted child foster child

DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY

o child placed with employee in anticipation of adoption o recipient in a qualied medical child support order or National Medical Support Notice Other child, if the individual is a qualifying child/relative per Internal Revenue Code (IRC) sections 106 and 152, and is less than 25 years old A covered dependent child who reaches the limiting age and is totally disabled, incapable of self-sustaining employment by reason of mental or physical handicap, primarily dependent upon the covered employee for support and maintenance and unmarried.

The Plan documents also establish requirements for proving dependency, should the Plan Administrator request it. Acceptable documentation, as stated in the Plan documents, includes a birth certicate, tax records, or the initiation of legal proceedings severing parental rights. Disabled dependents above the limiting age have an additional process for proving dependency.2 All of the Participants are local governments governed by Boards. These Boards scal responsibilities include ensuring that their municipalities pay insurance coverage benets for only those dependents of municipal employees who meet the Plans eligibility criteria. However, our review of the les of a sample of 52 dependents, selected randomly from the 1,149 dependents enrolled in the Plan, found no evidence of any documentation showing that these dependents met any of the eligibility criteria. Participants lacked such documentation because none of the Boards have adopted policies that require verifying dependents eligibility before enrolling them in the Plan and procedures for monitoring eligibility status. Adopted policies and procedures are an effective means of ensuring that appropriate controls are established to prevent and detect errors and inconsistencies and to ensure compliance with eligibility criteria as established in the Plan documents. For example, policies should require all applicants to provide proof of dependent status as part of the approval process and to annually conrm that claimed dependents meet eligibility criteria. It is also important that Boards develop related
2

We did not encounter any of these types of dependents during our audit.

OFFICE OF THE NEW YORK STATE COMPTROLLER

procedures that require Participants to maintain regular ongoing communication with their enrollees, either by personal contact or by correspondence from the enrollee (e.g., postcards, letters), so Participants can obtain written conrmation of the continuing eligibility status of claimed dependents. Procedures could also require that Participants send their employees an annual questionnaire to verify dependent eligibility, and to follow up with non-responders to ensure they receive replies conrming the status of all dependents. In addition, Participants could request that the Trust Board perform, or hire someone to perform, a one-time dependent eligibility audit to ensure that current dependents enrolled in the Plan are in fact eligible. Many employers use dependent eligibility audits as a way to ensure that the benets they are providing are going to qualied enrollees and dependents.3 Dependent audits are one-time or ongoing events that allow employers to validate the eligibility of dependents covered under their health and welfare insurance plans.4 At the time of our audit, the process for enrolling dependents was the same at all six local government entities: applications are initially prepared at the Participants ofces and then forwarded to the TPA, whose employees simply add the individuals to the Plan. According to TPA ofcials, their contract with the Trust requires that they process the application forms they receive from Participants, not verify dependent status. Given the absence of controls over dependent eligibility, we randomly selected a sample of 52 dependents from the population of 1,149 dependents enrolled in the Trusts Plan as of October 19, 2010. We reviewed the case les of these 52 dependents at the TPAs ofce and found that they lacked any supporting documentation; further, none of the participating municipalities could provide supporting documentation. We then worked with the Interim Plan Administrator to request documentation directly from enrollees to verify these dependents eligibility. Of the 52 dependents tested, 13 individuals (25 percent) could not provide evidence of dependent status, and are potentially ineligible for coverage by the Plan. When told about the results of our limited test, the Interim Administrator chose to wait until he received our audit report and recommendations before following up to resolve these exceptions.
3

www.hrmreport.com, RealLife HR Recommends Cost Savings Tool: Dependent Eligibility Audit. 4 www.hewittassociates.com, Ask Our Expert; Dependent Audit: An Introduction Aon Hewitt.

DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY

We attribute this relatively high rate of potentially ineligible dependents in the Plan to the fact that Participants do not request or require proof of dependent eligibility during the application process, or at any time thereafter. The Boards at these entities have not developed any procedures for verifying dependent status, and have not conducted any audits of dependent eligibility on their own. When we asked the Interim Plan Administrator for the Trusts written policies and procedures for verifying eligibility, he could provide only the Plan booklets given to employees at enrollment. The Plan documents developed by the Trust do outline the eligibility requirements for enrollees and dependents, as well as the supporting documentation that the Plan Administrator is authorized to request as proof of dependency. However, the Plan Administrator does not request such documentation. As a result, ineligible dependents may be receiving benets through the Trust. This adds costs to the Plan which, in turn, increases costs to the Participants that fund the Plan. The Trust could not provide us with an average annual cost per dependent. Therefore, to estimate the savings the Trust could realize by ensuring dependents eligibility, we relied on information published by human resources management experts, among other sources,5 who estimate a cost of $2,000 to $5,000 annually for each dependent. These same sources estimated that, on average, dependent eligibility audits identify between 2 percent and 8 percent of ineligible dependents. If the Trusts rate of dependent ineligibility were similar to these average rates, the Trust could potentially save from $45,960 to $459,6006 annually. However, our limited sample results found that the Trusts rate of potentially ineligible dependents, at 25 percent, was signicantly higher than the average rates. Based on a $2,000 to $5,000 annual savings per dependent and our 25 percent exception rate, the
5

www.hrmreport.com, RealLife HR Recommends Cost Savings Tool: Dependent Eligibility Audit. www.hewittassociates.com, Ask Our Expert; Dependent Audit: An Introduction Aon Hewitt. wsj.com, Dependents Under Scrutiny: Health-Care Worries Prompt Rise in Audits. www.buffalonews.com, Audit Uncovers Fraud. www.denverpost.com, More Companies Checking Out Dependents on Health Insurance Plans. 6 We multiplied the average ineligibility rates by the average costs per dependent to calculate that the Trust could save between $45,960 (2 percent x $2,000 x 1,149) and $459,600 (8 percent x $5,000 x 1,149).

OFFICE OF THE NEW YORK STATE COMPTROLLER

potential savings in Trust expenses could range from $574,500 to $1,436,250 annually. The Trust had expenses of $12,846,938 for the 2009 scal year and $11,646,379 for the 2010 scal year, so its average expenses for the two years were $12,246,658. By calculating the highest to lowest potential savings, stated above, as a percentage of the Trusts average annual expenses, we determined that identifying and disenrolling ineligible dependents could reduce Plan costs between 4.7 percent and 11.7 percent. Ensuring that only eligible persons receive Plan benets should provide for an equitable reduction in premiums paid by all enrollees, consistent with the Trusts mission of providing healthcare benets at a lower cost. Recommendations 1. Plan Participants should adopt written policies and procedures establishing controls requiring dependent eligibility to be veried with proper documentation that is reviewed and approved when dependents are enrolled and periodically thereafter. 2. Plan Participants should request that the Trust Board perform, or hire someone to perform, a one-time dependent eligibility audit to ensure that current Trust dependents are in fact eligible.

DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY

APPENDIX A RESPONSES FROM LOCAL OFFICIALS

We provided a draft copy of this global report to all six municipalities we audited and requested a response from each local government. However, none of the municipalities chose to respond to this report.

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OFFICE OF THE NEW YORK STATE COMPTROLLER

APPENDIX B AUDIT METHODOLOGY AND STANDARDS

Our overall goal was to evaluate whether Participants had adequate internal controls over dependent eligibility to ensure cost savings. We conducted this performance audit in accordance with generally accepted government auditing standards (GAGAS). Those standards require that we plan and perform the audit to obtain sufcient, appropriate evidence to provide a reasonable basis for our ndings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our ndings and conclusions based on our audit objectives. We interviewed Trust and participating local government ofcials regarding dependent eligibility requirements, to obtain an understanding of the process for adding dependents to the Trusts plans, and to obtain gures on their health insurance costs. Using computer added sampling, we set the parameters at 95 percent condence in the testing results, an upper error limit of 15 percent, and an expected error rate of 5 percent. Our total dependent population was 1,149 and the result was a statistically random sample of 52 dependents. o We reviewed the case les of these 52 dependents at the TPAs ofce.

o We worked with the Interim Plan Administrator to request supporting documentation to verify the eligibility of these 52 dependents. o We reviewed the supporting documentation provided by these 52 dependents to verify the dependents eligibility. We reviewed written Plan documentation to gain an understanding of the Trusts requirements for dependent eligibility. We researched and documented average dependent costs and average rates of ineligible dependents published in articles by various resources. Using the gures provided by the Trust and statistics from researching, as well as the results of our testing, we projected the range of possible savings based on the Trusts expenses.

DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY

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APPENDIX C HOW TO OBTAIN ADDITIONAL COPIES OF THE REPORT

To obtain copies of this report, write or visit our web page:

Ofce of the State Comptroller Public Information Ofce 110 State Street, 15th Floor Albany, New York 12236 (518) 474-4015 http://www.osc.state.ny.us/localgov/

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OFFICE OF THE NEW YORK STATE COMPTROLLER

APPENDIX D OFFICE OF THE STATE COMPTROLLER DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY
Steven J. Hancox, Deputy Comptroller Nathaalie N. Carey, Assistant Comptroller

LOCAL REGIONAL OFFICE LISTING

BINGHAMTON REGIONAL OFFICE H. Todd Eames, Chief Examiner Ofce of the State Comptroller State Ofce Building - Suite 1702 44 Hawley Street Binghamton, New York 13901-4417 (607) 721-8306 Fax (607) 721-8313 Email: Muni-Binghamton@osc.state.ny.us Serving: Broome, Chenango, Cortland, Delaware, Otsego, Schoharie, Sullivan, Tioga, Tompkins Counties NEWBURGH REGIONAL OFFICE Christopher Ellis, Chief Examiner Ofce of the State Comptroller 33 Airport Center Drive, Suite 103 New Windsor, New York 12553-4725 (845) 567-0858 Fax (845) 567-0080 Email: Muni-Newburgh@osc.state.ny.us Serving: Columbia, Dutchess, Greene, Orange, Putnam, Rockland, Ulster, Westchester Counties

BUFFALO REGIONAL OFFICE Robert Meller, Chief Examiner Ofce of the State Comptroller 295 Main Street, Suite 1032 Buffalo, New York 14203-2510 (716) 847-3647 Fax (716) 847-3643 Email: Muni-Buffalo@osc.state.ny.us Serving: Allegany, Cattaraugus, Chautauqua, Erie, Genesee, Niagara, Orleans, Wyoming Counties

ROCHESTER REGIONAL OFFICE Edward V. Grant, Jr., Chief Examiner Ofce of the State Comptroller The Powers Building 16 West Main Street Suite 522 Rochester, New York 14614-1608 (585) 454-2460 Fax (585) 454-3545 Email: Muni-Rochester@osc.state.ny.us Serving: Cayuga, Chemung, Livingston, Monroe, Ontario, Schuyler, Seneca, Steuben, Wayne, Yates Counties

GLENS FALLS REGIONAL OFFICE Jeffrey P. Leonard, Chief Examiner Ofce of the State Comptroller One Broad Street Plaza Glens Falls, New York 12801-4396 (518) 793-0057 Fax (518) 793-5797 Email: Muni-GlensFalls@osc.state.ny.us Serving: Albany, Clinton, Essex, Franklin, Fulton, Hamilton, Montgomery, Rensselaer, Saratoga, Schenectady, Warren, Washington Counties

SYRACUSE REGIONAL OFFICE Rebecca Wilcox, Chief Examiner Ofce of the State Comptroller State Ofce Building, Room 409 333 E. Washington Street Syracuse, New York 13202-1428 (315) 428-4192 Fax (315) 426-2119 Email: Muni-Syracuse@osc.state.ny.us Serving: Herkimer, Jefferson, Lewis, Madison, Oneida, Onondaga, Oswego, St. Lawrence Counties

HAUPPAUGE REGIONAL OFFICE Ira McCracken, Chief Examiner Ofce of the State Comptroller NYS Ofce Building, Room 3A10 Veterans Memorial Highway Hauppauge, New York 11788-5533 (631) 952-6534 Fax (631) 952-6530 Email: Muni-Hauppauge@osc.state.ny.us Serving: Nassau and Suffolk Counties

STATEWIDE AND REGIONAL PROJECTS Ann C. Singer, Chief Examiner State Ofce Building - Suite 1702 44 Hawley Street Binghamton, New York 13901-4417 (607) 721-8306 Fax (607) 721-8313

DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY

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