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.

Healthcare Costs for Ineligible Dependents - Wasn't Clear - Now It's Clear

For the past two 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.

Today and tomorrow we want to highlight a few of the comments made by interested parties to the proposed rule.

One respondent to the draft rule stated that the treatment of ineligible fringe benefit costs as expressly unallowable does not comport with CAS 405. CAS 405 uses the term "expressly" in the definition of "expressly unallowable costs" as "...that which is in direct and unmistakable terms." The respondent believed that "fringe benefit costs ... contrary to law, employer-employee agreement, or an established policy of the contractor" are not direct and unmistakable costs. DoD had an answer for this concern. DoD stated that "The Director of Defense Pricing Policy determined these conditions are direct and unmistakable." So there, take that.

Another respondent thought that the FAR coverage was already adequate - that contractors are currently required to exclude fringe benefit costs that do not meet the requirements for reasonableness. DoD had an answer for this concern as well. DoD stated that "The results of the DCAA audits have made it clear that coverage is not sufficiently clear". How's that again? Clear that its not clear?

Now that the auditors are emboldened with this new DFARS rule, we can expect to see increased emphasis on ascertaining whether contractors have effective policies for excluding healthcare payments for ineligible dependents.

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.

Healthcare Costs for Ineligible Dependents Now Subject to Penalty

DoD published a final rule last Friday, adding Part 232.205-6(m)(1) to the DoD FAR Supplement (DFARS) as follows:

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

Now that might not seem like such a big deal. Its almost common sense. But what we have here is the health care for ineligible dependents issue that's been causing a lot of grief for the contractor community. The amendment doesn't mention health care for ineligible dependents but when one reads the promulgation comments, its pretty clear that this is what its about.

We've discussed this issue several times on this blog (e.g. here and here and here). DCAA (Defense Contract Audit Agency) has been pretty aggressive on this issue and not only where they questioning the costs but were also classifying them as expressly unallowable subject to penalty. In February 2012, DoD told the Agency to knock off the expressly unallowable business until such time as it could modify the DFARS. Well, the DFARS has not been modified and any medical benefits paid to or for ineligible dependents are not only unallowable but are expressly unallowable and subject to penalties.

What's more, the generalized nature of the new DFARS provision will make it more likely that DCAA and contracting officers are going to use it for all manner of questioned costs - even those that haven't yet been thought of.

Since this is a DFARS matter, it applies to only DoD contracts. That alone is going to require some complex calculations if the auditors find health care payments to ineligible dependents at contractors with a mix of DoD and non-DoD Government contracts. In fact, it might be worth the cost of admission just to watch the auditors fumble around with these calculations.

Tomorrow we are going to look at some of the comments received on the proposed regulation that preceded this final rule and DoD's response to those comments. It seems like DoD was going through a formality by requesting comments because they gave short shrift to everyone's concerns and published anyway.