Health Care Costs - Ineligible Dependents

Are you covering health care costs for ineligible dependents of your employees? No? How do you know? Can you prove it to a contract auditor?

Back in 2012 and 2013, health care costs associated with ineligible dependents (e.g. divorced spouses and "aged-out" children) was a hot-button topic within the DoD contracting community. Eventually, DoD modified its FAR Supplement (DFARS) to make such costs specifically unallowable. In publishing the rule, DoD stated its belief that contractors should have adequate internal controls to ensure improper healthcare charges are excluded from fringe benefit costs. The new rule was published to encourage contractors to adopt reasonable internal controls to eliminate costs that are already unallowable. We can't argue with that and we wrote about the new rule, its implementation, and the Government's oversight activities extensively. See, for example here, here, and here.

The brouhaha has quieted considerably since 2013. By focusing on "reasonable internal controls" to ensure improper healthcare charges are not passed on to the Government, DoD quieted the demands from some contract auditors who were challenging contractors to produce painstaking detailed proof of eligibility, sometimes going back five years or more. Back then, at least at some contractor locations, contract auditors did not focus on internal controls but demanded individual by individual proof of dependent eligibility. In one case, auditors were demanding that a contractor "prove" that a dependent was a student five or so years earlier and therefore qualified to receive medical benefits under the company's medical care plan.

We never really understood the audit concerns from a risk standpoint. While there may have been instances where ineligible dependents were benefiting from an employer's health care plan, there was never any evidence to suggest that it was widespread and material. Even if there were egregious examples (and none were ever publicized), the extra cost probably would not have moved the fringe benefit rate and therefore, no impact on Government contracts. Contract auditors wasted a whole lot of time on matters that were immaterial and had no payback in terms of reduced fringe rates.

Nevertheless, contractors should continue to assess the adequacy of their internal controls for ensuring that ineligible dependents are not benefiting from company health care plans. Contract auditors continue to ask about those controls. In the latest version of DCAA (Defense Contract Audit Agency) standard audit program for reviewing incurred costs (December 2016 version), auditors are directed to perform the following analysis:

Health Care Costs. As part of the review of health care costs, verify the contractor included only health insurance premiums and claims for “eligible dependents”. Request the contractor to demonstrate its procedures for ensuring only costs related to eligible dependents have been included in the claimed costs. Based on the understanding of the contractor’s processes and overall risk, design procedures to test claimed costs are related to only eligible dependents. 

Good controls reduce risks and will result in reduced testing. Its that simple.