Healthcare Costs for Ineligible Dependents - Broadening the Fringe Benefit Category

Yesterday, we discussed the new DFARS Cost Principle on Fringe Benefits and the reasons why DoD felt the need to amend its FAR Supplement. The new revision is very concise and reads "Fringe benefit costs that are contrary to law, employer-employee agreement, or an established policy of the contractor are unallowable."

A few years ago, DCAA tapped into what it thought was the Mother Lode of questioned costs. It found a contractor that had not done a very good job of screening employee dependents for eligibility under the terms of its health insurance policy before paying for or reimbursing the employee for medical expenses.
So, the Agency questioned those costs related to ineligible dependents. News of that spread like wildfire among contract auditors and pretty soon, everyone joined in and began asking contractors to prove there were no payments made to ineligible dependents. Of course, it didn't matter that the auditors didn't find any evidence of improper payment. They could just look at the contractors policies and procedures and if the contractors didn't have policies and procedures to ensure that ineligible dependents were identified and excluded from any reimbursement, the auditors would derive a figure out of whole cloth.

One positive aspect of DoD's implementing language is this:

DoD (believes) that contractors should have adequate internal controls to ensure improper healthcare charges are excluded from fringe benefit costs. The rule encourages contractors to adopt reasonable internal controls to eliminate costs that are already unallowable.

The focus here is on the implementation of an internal control system. Internal controls are not designed to ensure absolute accuracy but are designed to provide "reasonable" assurance that unallowable costs are not charged to the Government. Contractors cannot be expected to review every healthcare claim submitted for payment or reimbursement. That would never be cost effective. But, one suggestion is for contractors to require that employees periodically update their dependent eligibility statements.

Broadening the Category

One thing that puzzled us was why, if the issue was healthcare payments to ineligible dependents, does the rule address the borad category of "finge benefits". DoD answered that question. DoD stated that the same logic that applies to healthcare (e.g. good internal controls), applies to all fringe benefits. So, there you go.

Materiality

DoD stated that "Research indicates the rate of ineligible dependent claims can represent as much as three percent or more of total healthcare costs. The overall cost for ineligible dependent claims, which are often fraudulent, can be significant for large contractors that spend millions of dollars for dependent healthcare". Really? Three percent? We would really like to see that research.