HDH Newsletters

Healthcare Eligibility Audits on the Rise

Most employers are familiar with strategies for managing the rising costs of healthcare, strategies such as employee co-pays, health savings accounts, health and productivity (wellness), the redesigning of benefit packages, and others. There is another approach that is becoming increasingly popular– Healthcare Eligibility Audits. Most companies conducting these audits are realizing positive results in the short-term.

A recent Watson Wyatt survey of 489 employers for the National Business Group on Health found that healthcare eligibility audit reviews are the fastest growing change that companies are making to their healthcare programs. According to their studies, in 2007 only 42% of employers audited or reviewed healthcare eligibility. They project that over 60% of employers will audit eligibility requirements in 2009. A healthcare eligibility audit requires employees to provide documented proof, rather than just give their word, that spouses and dependents meet the company’s medical coverage eligibility requirements.

Some employers are understandably concerned about employees’ negative reaction to such audits. However, industry watchers note that many companies that have used these audits have been able to hold the line on increased co-pays and employee contributions without cutting benefits, due to the savings these audits have delivered. In difficult economic conditions, employees are typically more open to participating in health plan audits if they believe the savings generated will be used to avoid more concerning cost-cutting measures, such as pay freezes or layoffs.

Auditors estimate the numbers of dependents enrolled in the average health plan that don’t meet its eligibility requirements are between 4% and 15%. Reasons for ineligibility can include a change in marital status, a change in student status, a death, or that a dependent does not meet the definition of a legal dependent as defined by the IRS. Benefit costs for dependents can be $3,000-$5,000 annually.

The Wall Street Journal recently reported that an audit of a large retailer's health plan with an estimated 63,000 enrolled, approximately 37,000 as dependents, revealed that 12.6% of the dependents didn't meet the plan's eligibility requirements. The audit and ensuing enrollment reductions produced a projected first-year savings to the employer of approximately $25 million.

“Regardless of a company’s size, healthcare eligibility audits for the most part deliver savings that can be realized rather quickly as compared to other valuable, but more long-term, cost containment strategies,” said Barb McGinley, a senior vice president and manager of HDH’s Benefit Division.

Most cases of ineligible dependents are due to a lack of awareness about a plan’s eligibility rules, not fraud. Consequently, when considering whether this strategy will work, it is essential to consider how such a plan would be introduced and rolled out to the workforce. As with any employee program, effective communication and planning is critical to the successful implementation of a healthcare eligibility audit.

Company executives need to clearly communicate that reasons for the audit and eligibility enforcement are to ensure the ongoing financial stability and compliance of the business – and not to penalize employees for any past errors. Including an amnesty policy should also be considered, to reinforce that the company’s purpose is not to penalize past, unintentional errors. Finally, to ensure ongoing compliance and continued savings, companies should include eligibility reviews during the hiring and new enrollment process.

The HDH Group is available to help determine if this healthcare cost containments strategy is right for your business, and to help successfully implement a healthcare eligibility requirement program. Call your HDH Group account manager for more information.

Spotlight on Compliance

Health Insurance Portability and Accountability Act (“HIPAA”) Reform

Revisiting the American Recovery and Reinvestment of 2009 Act (“ARRA”) and its changes to HIPAA requirements, including the introduction of the Health Information Technology for Economic and Clinical Health Act (“HITECH”).

Group health plan sponsors should be aware of several changes to HIPAA requirements as a result of ARRA. One of these changes is the requirement that covered entities, including group health plans, provide notification to individuals and the Department of Health and Human Services (“HHS”) if unsecured protected health information (“PHI”) has been breached. When the HITECH Act was initiated, it extended certain HIPAA privacy and security provisions to business associates. The other area of the new rules affects plan sponsors of group health plans working with business associates with whom they have entered into contracts to share PHI. Those business associates are now subject to HIPAA privacy and security rules to the same extent as the covered entity.

On April 17, 2009, HHS released guidance on how PHI can be protected so it not considered “unsecured PHI”. We are providing a summary of the highlights to assist in your compliance efforts.

• Once a breach has occurred providing unauthorized access, use or disclosure of PHI, the group health plan must notify affected individuals within 60 days after a breach is discovered. Individuals or entities include:
• HHS on all breaches;
• If 500 or more individuals in a single State or jurisdiction are affected, notification must be provided in prominent media outlets serving that State or jurisdiction;
• Web site or in major print or broadcast media for Plan’s that do not have current or sufficient information to contact 10 or more individuals.
• As well, business associates must notify the affected group health plan or other covered entity if they become aware of a breach.
• Notices to individuals should include the following information:
• Date of the breach (if known), date of discovery, a brief description of what happened;
• Types of PHI involved;
• Steps to avoid harm as a result of the breach;
• Description of what the plan is doing to investigate, mitigate losses and avoid further breaches;
• Contact procedures for questions or to obtain additional information, including a toll-free number, e-mail address, Web site or postal address.

HHS guidance also considers unsecured PHI not subject to notification requirements if it is rendered “unusable, unreadable, or indecipherable to unauthorized individuals”.

Two methods are recognized by which PHI can be “secured”

1. Encryption - guidance provides an exclusive list of acceptable encryption methodologies; and
2. Destruction - hard copies of PHI will be considered destroyed if they are unreadable and cannot be reconstructed. Electronic media must be cleared, purged or destroyed consistent with publications issued by the National Institute of Standards and Technology. This publication is available at: www.csrc.nist.gov.

HITECH requires that employers whose health plans must comply with HIPAA privacy and security regulations review and update their business associate contracts to reflect the new rules. Business associate contracts were previously the responsibility of the covered entity to identify and obtain necessary agreements. The new rules require business associates to be more proactive in compliance the security policies and procedures as well as adopting appropriate physical, administrative and technical safeguards.

HHS is now required to conduct periodic audits of business associates in addition to covered entities. Business associates will now be subject to the same civil and criminal penalties for violations.

For more information, the HHS guidance is available at: www.hhs.gov

The Mental Health Parity and Addiction Equity Act of 2008 (“MHPA”)

Is your plan design up to date with the Mental Health Parity and Addiction Equity Act of 2008? The effective date for calendar year plans is January 1, 2010.

The MHPA enacted as of October 3, 2008 requires parity in all financial requirements and treatment limitations, including substance abuse disorders. It also provides parity for out-of-network benefits and provides new disclosure requirements. The effective date of the new rule is January 1, 2010 for calendar year plans. Collectively bargained plans have a separate effective date.

The new rules will be enforced by the Department of Labor, Internal Revenue Service and the Department of Health and Human Services. All agencies are expected to release guidance by October 2009.

Plans subject to the new rules are: group health plans and health insurance coverage offered in connection with group health plans that cover both mental health and medical benefits. Therefore, there is no requirement that plans offer mental health or substance abuse benefits, but if they do, they must comply with the new regulations. Exemptions include: small employers with fewer than 50 employees and an opt-out for nonfederal, governmental plans.

Changes from the current to the new law include:

• The new law requires substance abuse disorders (“SA”) be covered in addition to mental health (“MH”), previous law specifically excluded SA;
• Current law permits lower limits for SA, new law does not permit lower limits;
• Treatment limitations and financial requirements are not mentioned in the current law, the new law requires MA/SA not be more restrictive than main features in limitations for medical benefits, with no separate limitations and restrictions for MH/SA;
• Parity is now required in the new law for out-of-network coverage;
• Disclosure in the new law is required for reasons of benefit denial and medical necessity criteria, upon request;
• A cost increase exemption is provided on a limited basis in the new law if costs
• All other aspects of the current law remain unchanged.

Employer provided group health plans must comply with state parity mandates. However, if your plan is self-insured, state laws are pre-empted by ERISA. Insured plans are subject to state insurance laws or mandates.

We recommend that employers who offer mental health and substance abuse benefits review their plans with regard to:

• Cost sharing arrangements (i.e. co-pays, co-insurance);
• Out-of-network coverage;
• Level of coverage by diagnosis;
• Treatment limitations; and
• Disclosure requirements.

Employers who offer multiple health plans can vary their benefits by option, as long as there is parity with the main features of medical benefits (i.e. co-pays, coinsurance, etc.).

As mentioned above, the law allows for a cost increase exemption of two percent of actual total plan costs in the first plan year in which the requirements are applied and one percent in each subsequent plan year. However, the plan must comply for the first six months of the new rules effective dates. The exemption will only apply for the plan year after which the determination for exemption is made. In the event of exemption, the plan must notify the appropriate agencies, participants in the plan and their beneficiaries.

More information related to this rule can be found at: www.cms.hhs.gov.

For more information on compliance issues,
please contact your HDH Group account manager.

Beyond Benefits: Understanding Captives

By: William Knox, ARM
Director, Alternative Risk Division
HDH Group

When insurance markets begin to harden, there is invariably more discussion amongst risk managers and financial officers about captives; discussing whether or not the business should consider this sort of alternative risk strategy. In light of the current market cycle, this article revisits what a captive is by describing and outlining the fundamental benefits of this alternative risk transfer vehicle, and discusses how to determine whether a captive is a good option for the organization.

Captives 101
Most risk managers of large organizations are familiar with the constructs of a captive, even if their company does not employ this alternative risk management strategy. However, due to changes in tax, regulatory and market conditions – including the growth in onshore locations for domiciling captive insurance companies – more and more, captives represent a viable risk management option for a variety of organizations, not just the large multinationals.

According to Towers Perrin, a captive is:

“A closely held insurance company whose insurance business is primarily supplied by and controlled by its owners, and which the original insureds are the principal beneficiaries. A captive insurance company’s insureds have direct involvement and influence over the company’s major operations, including underwriting, claims management, policy, and investment.”

Or, more simply, a captive is a formalized form of self insurance. It enables organizations to retain some of its risk internally by forming an insurance company to insure its own risk.

The majority of captives are used to insure standard property and casualty risks – things like workers’ compensation, product liability, and professional liability. However, a growing number of large captive owners have started using captives to insure some employee benefit risks. And, some industry analysts project that captives will eventually be used for pension and postretirement benefits.

Captive Benefits
Before the thought of forming and running your own insurance company becomes overwhelming – let’s discuss some of the reasons to consider forming a captive.

First and foremost, costs. An important qualifier is costs over time. I didn’t say reduced costs, though captive owners should aim to realize decreased costs over time. There are other important cost considerations beyond reductions to be considered, though I understand that reducing costs is a goal of most captive owners.

Other cost benefits include stabilized budgets, tax benefits, and even decreased insurance costs for risks outside of the captive. With captives that have been formed under the right circumstances (a topic for a future article), the company will typically be able to set insurance reserves equal to expected losses, providing consistency in insurance costs. The goal here is a good spread of risk with predictable losses. Additionally, tax advantages only available to insurance companies can be extended to the captive – again, if the captive was created properly with this benefit in mind.

For organizations that have formed a captive to self insure some of their risks, they now have a stronger position from which to negotiate improved rates with commercial insurers for risks outside of their captive. Commercial insurers understand that once a company insures a risk through a captive that risk rarely moves back to the commercial market. So, if a carrier knows the organization has the option to move other risks into an established captive, they are typically inclined to extend more favorable terms than they might have otherwise.

Of course there are other benefits to consider, but the above highlight some of the primary benefits. Once an understanding of why to consider a captive has been established, next organizations need to determine whether or not it really is the right strategy for the business.

Forming a Captive
The first step on the journey to forming a captive is the feasibility study, which in reality should include a pre-feasibility study. The full study is involved and will require an investment of time and money. So, before conducting a full study, organizations can take an early captive litmus test by: identifying the reasons for considering a captive and the objectives for such a program; reviewing their current insurance program and loss experience; and determining whether or not there are any organizational or industry factors that would undermine the success of such an alternative risk transfer strategy. Depending on the outcome of this initial analysis and evaluation, the organization may determine that it does, or doesn’t, make sense to hire a business advisor to conduct a more formal evaluation and ultimately a full-blown feasibility study.

It is important to understand that the success of a captive is directly related to upfront expectations, how it is formed, and most importantly how it is managed. Since most companies considering a captive are not currently ‘in’ the insurance industry, most will retain a business advisor that specializes in captives to initially guide them through their evaluation process, and ultimately to form and manage the captive.

The HDH Group is such a business advisor. We currently manage over $20 million in alternative risk program premiums across six different domiciles for a wide variety of clients, including banks, healthcare facilities, contractors, restaurants, manufacturers, and others.

If you are ready for an alternative to the traditional insurance marketplace, the HDH Group can provide an initial evaluation to help you determine if a captive is the right choice for you.

About the Author: Bill Knox manages the Alternative Risk Division of the HDH Group. He has spent over 22 years in the insurance industry, serving in various positions in New York, Los Angeles, and Pittsburgh. He began his career with the captive division of Cigna Worldwide in New York City before transferring to Los Angeles in 1989. He then came to Pittsburgh in 1991 as Vice President and Global Manager for a national broker before joining the HDH Group in February of 1998.

HDH Promotions
HDH recently promoted Barbara McGinley to senior vice president and manager of the firm's Benefits Division. Barbara has over 18 years of experience in the investment, individual and group insurance industries. Other recent promotions in its Benefits Division include Eric Rheam to Senior Consultant and Amber Daer to Benefits Administrative Assistant.

HDH New Hires
Nevin Beyer recently joined the HDH Group’s Construction Division. Located in our Harrisburg office, Nevin’s area of focus is the origination, placement and processing of Contract Surety Bonds. Prior to joining HDH Group, Nevin was CEO of Velocity Financial Services and has over 14 years of banking and financial services industry experience.

Welcome New Clients!
HDH is pleased to welcome our new clients. The first quarter of 2009 represents the third-best quarter for new business development in HDH’s 26 year history. We recognize that now more than ever clients are looking for strategic business advisors that work to improve their bottom-line performance, so we thank you for the trust you have placed in HDH. As an employee-owned company, all of us at the HDH Group are committed to assuring our clients’ success and we look forward to building a long and rewarding relationship with all of our new clients.

Welcome!