Healthcare Costs for Ineligible Dependents - Cost/Benefit

For the past three days, we've been discussing the new DFARS (DoD FAR Supplement) Cost Principle on Fringe Benefits. The new rule reads:

Fringe benefit costs that are contrary to law, employer-employee agreement, or an established policy of the contractor are unallowable.

Someone asked us about the definition of ineligible dependents. It depends upon the healthcare policy's definition of "dependent". Often, dependent children become ineligible because of age or they lose their full-time student status. Companies can track ages pretty well but its more difficult to determine whether the child remains a full-time student. Divorces can also make ex-spouses ineligible. Ultimately, one needs to review the eligibility requirements of the health insurance policy. Everyone is a bit different - and some are much more generous than others.

Continuing now with the Q&As from the draft rule.

One respondent suggested that the rule will force companies to expend disproportionate sums to ensure no claims for costs include ineligible healthcare costs in order to avoid penalties. DoD replied that ineligible fringe benefit costs are already unallowable under existing regulations. The new rule only make them expressly unallowable so that penalties can be levied.

Another respondent asserted that the costs of internal controls should not exceed the actual costs of the ineligible benefits. Treating the costs as expressly unallowable is likely to force companies to spend more money than they would otherwise, in order to avoid the penalties. The result will be increased allowable costs to the Government in exchange for little or no value. DoD cited research that indicates the cost of ineligible dependent health care claims often far excceds the cost of dependent verification programs. DoD was unable to find any studies or other evidence indicating that the cost to detect ineligible claims is higher than the cost savings. Here again, we're suspicious of these "studies". 

Perhaps we've beaten this subject to death. In closing, we want to make sure that everyone understands the importance of insuring compliance with this new rule. It's not going away and we don't expect that DCAA will be satisfied with existing internal controls systems no matter how comprehensive they may be. We know of a company that is 93 percent commercial, 7 percent government and has a TPA (third party administrator) performing eligibility verification. That wasn't enough for DCAA because the contractor had no procedures in place to ensure that the TPA was doing the job it was paid to do. As a result, DCAA questioned significant costs assuming that all dependents over 18 were ineligible.

9.Fully or Partially Subject to CAS

Comment: One respondent asserted that the proposed rule has the effect of discriminating against companies that are fully or partially subject to CAS. The respondent asserted that, for those fully subject to CAS and those partially subject to CAS, the potential risk for liability for claiming unallowable costs is significant, while companies that are not subject to CAS have no such liability and do not face the possibility of False Claims Act prosecutions, Civil False Claims Act damages, qui tam lawsuits or debarment/suspension. A rule that allows companies subject to CAS to use a reasonable method for dealing with these costs will reduce the cost to the companies and reasonably protect the government from paying for the costs of ineligible dependent healthcare costs.

Response: The rule and, thus, the potential liability to incur penalties, apply equally to all contractors regardless of whether they are subject to CAS. Therefore, the rule does not discriminate against companies that are fully or partially subject to CAS. Additionally, the assertion that companies not subject to CAS do not face the possibility of False Claims Act prosecutions, Civil False Claims Act damages, qui tam lawsuits or debarment/suspension is inaccurate.