Dependent Eligibility Under Healthcare Reform

Cost-Containment Strategies for Employers

The Patient Protection and Affordable Care Act (ACA) and the Health Care and Education

Affordability Reconciliation Act (HCEARA) have changed the landscape of dependent eligibility for employer-sponsored health coverage. Much of the uncertainty about the new healthcare legislation has yet to be clarified by the regulatory bodies, and legal challenges and calls for repeal of the law do nothing to simplify its implementation. However, the Department of Health and Human Services (HHS) has issued interim final rules regarding how dependent eligibility can be defined under healthcare reform. Based on these rules, HMS has identified some strategic actions employers can take now that will reduce the financial impact of the health reform laws on their health plans.

Impact of Legislation on Enrollment in Employer-Sponsored Health Plans

According to the Congressional Budget Office (CBO), roughly 150 million people are covered by employer-sponsored health plans. Prior to the enactment of healthcare reform, that number was projected to increase to 153 million in 2011. However, the CBO now estimates that the combined effect of ACA and HCEARA will cause that initial estimate to increase by an additional 3 million lives in 2011 alone.   Over 95% of this estimated increase will result from dependents joining a parent’s plan according to the new policy.   This increase will be felt immediately and persist through 2015, as illustrated in Figure 1.

FIGURE ONE - LIVES COVERED BY EMPLOYER-SPONSORED HEALTH CARE (IN MILLIONS)

The key ACA provision that drives this growth is the change in age threshold for dependent eligibility, rising from age 19 to 26.  The policy has two primary components: 

• “Coverage Extended to More Children. The goal of this new policy is to cover as many young adults under the age of 26 as possible with the least burden.  Plans that offer dependent coverage must offer coverage to enrollees’ adult children until age 26, even if the young adult no longer lives with the parents, is not a dependent on a parent’s tax return, or is no longer a student.  The policy applies to both married and unmarried children (although their own spouses and children do not qualify).  There is a transition for certain existing group plans until 2014 if the adult child has another offer of employer-based coverage aside from coverage through the parent.
• “Same Benefits/Same Price. Any qualified young adult must be offered all of the benefit packages available to similarly situated individuals who did not lose coverage because of cessation of dependent status. The qualified individual cannot be required to pay more for coverage than those similarly situated individuals.  It is important to note that the new policy applies only to health insurance plans that offer dependent coverage in the first place: while most insurers and employer-sponsored plans offer dependent coverage, there is no requirement to do so.” 

In order to formulate an effective cost-containment strategy, employers must understand how an adult dependent’s employment affects their eligibility for coverage under a parent’s plan. According to the U.S. Census Bureau, there were nearly 9 million uninsured adults ages 19 up to 26 in 2008. Nearly half of those uninsured adults worked full-time, and one quarter worked part-time during that year. Many had access to their own employer-sponsored coverage, but chose not to obtain it.

The Kaiser Family Foundation indicates that “young adults are less likely to take-up the employer coverage that is available to them”.  The lower health coverage take-up rate of young adults is most likely due to differences in income level, health status, and attitudes about the importance of health insurance coverage.    

To address this dynamic, an important provision of ACA allowed “grandfathered plans” to be exempt from most of the changes imposed under reform.  Grandfathered plans are defined as pre-existing health plans that maintain the majority of their pre-reform characteristics.  With respect to the enrollment of employees’ adult dependent children up to age 26, grandfathered plans were permitted to exclude, through 2014, those children who are eligible for coverage through the child’s own employer. 

This is an important benefit that can allow an employer with a grandfathered plan to avoid significant expenses during the period 2011-2014.  Taking advantage of the benefit requires that the employer implement a procedure to determine which adult dependents have access to their own employer-sponsored coverage.  A straightforward approach is to conduct an “eligibility review” that requires the employee to submit, for each adult dependent on the plan (such as those over age 19 and older), proof of their relationship to the adult dependent (such as a birth certificate) and a signed statement indicating that the adult dependent is not employed.  For adult dependents who are employed, eligibility can be verified by requiring the submission of a signed statement from the adult dependent’s employer indicating that he or she is not eligible to enroll in the employer’s health plan.  In the course of conducting this type of eligibility review, HMS has found that many young adults who were originally enrolled are removed as a result of requiring proof of their eligibility. 

Finally, employers may wish to consider that ACA has no broad requirements regarding the extension of supplementary benefits, such as dental coverage.  If these benefits are offered, they may continue to be restricted according to the plan document.  In many cases, it will be cost-effective for an employer to verify student status, in addition to employment status, of adult dependents, in order to determine their eligibility for these other types of coverage.

Be Proactive

As an employer, it is essential that you communicate what healthcare reform does and does not mean for employees. Confusion about healthcare reform among the general public is very high. Employers that proactively address healthcare reform with their employees will reduce the administrative costs and employee anxiety associated with any misconceptions. Employers should incorporate guidance into any health plan communications they are currently engaging in with their employees.

Establish a Process

Employers who maintain their grandfathered group health plan status have a very strong advantage in their effort to reduce the cost impact of the new dependent requirements.T

he requirements regarding coverage of adult dependent children are quite similar to provisions in many health plans that require that an employee’s spouse take health coverage from his or her own employer, if available, or face surcharges, secondary coverage or exclusion from the plan.  HMS has long used the process of requiring statements from employees, spouses and spouses’ employers to enforce compliance with these requirements.  This process, incorporated into the overall dependent eligibility review process, is quite effective in removing spouses who had avoided enrollment in their own employer’s plans simply because they were previously able to violate their spouse’s plan rules with impunity.  Considering that employment mobility is quite high, and spouses and adult dependent children are eligible to change their health coverage options annually, it is cost-effective to re-verify eligibility at least annually for these dependents whose eligibility for an employer’s plan are based on the dependent’s employment status.

Employers should act now to protect themselves from the increased cost burden that they may shoulder as a result of healthcare reform. Although there are still many unknowns, employers who take action now to review the eligibility of dependents on their plan may set themselves up for substantial healthcare cost savings over the coming years.

1.  Congressional Budget Office - Estimated Effects of the Insurance Coverage Provisions of the Reconciliation Proposal Combined with H.R. 3590 as Passed by the Senate

2.  CMS Office of the Actuary “Estimated Financial Effects of the Patient Protection and Affordable Care Act”

3.  Young Adults & the Affordable Care Act: Protecting Young Adults & Eliminating Burdens on Families & Business

4.  Changes in Employer-Sponsored Health Insurance Sponsorship, Eligibility, and Participation

5.  Urban Institute - Health Insurance Coverage of Young Adults

About HMS

HMS is the nation's leader in coordination of benefits and program integrity services for healthcare payors. HMS's clients include health and human services programs in more than 40 states; commercial programs, including commercial plans, employers, and over 120 Medicaid managed care plans; the Centers for Medicare and Medicaid Services (CMS); and Veterans Administration facilities. As a result of the company’s services, clients recovered over $1.8 billion in 2010, and saved billions of dollars more through prevention of erroneous payments.

About the Author

Rich Flaherty is the Vice President of Sales and Marketing for the Employer Solutions division of HMS.  Prior to HMS he worked in the technology and healthcare industries, including 17 years with Hewlett-Packard.