Health Insurance Audits, Corrections and COBRA – Oh My!

Monthly audits of your health insurance bills can avoid lawsuits and COBRA penalties.

The new year has started and one of the projects you’ve been given is to audit your health insurance plans to make sure the bills are accurate.  After you begin to compare your records against the insurance company records, you discover three problems:

1. Some employees should have been active but aren’t on the insurance invoice
2. Some dependents are no longer eligible for coverage but are still on your invoice
3. Some employees terminated employment months before but you are still being billed for them

What is an employer to do?

An employer should correct the situation as soon as possible.  In the first case, it may not cause too much of a problem.  But let’s take a closer look at each of these situations.  In particular on how this not only impacts employer liability but also how COBRA can take an extra big bite out the employer’s bottom line.

Employee Should be Active:

Normally, an employer will become aware of this problem as soon as the employee needs to use the benefit(s).  However, if a year (or more) has passed before you discover the error you will need to do the following steps.

First, make sure the insurance carrier will be able to add the person to the coverage retroactive to the original enrollment date.  If it can’t be done, the employer should get the employee added as soon as possible to the plan(s).  It should be noted the employer could be liable for any claims that were incurred during the uncovered period.

Second, the employer should verify that the COBRA Initial Notice (or sometimes referred to as the General Notice) was given to the employee and his/her covered spouse (if applicable) within 90 days of their enrollment in a COBRA qualified health plan.  Failure to provide this notice may not only result in costly litigation, but also penalties of up to $110 per day.  A single infraction could easily cost an employer thousands of dollars, especially if a year or more has passed.

Dependent No Longer Eligible:

Even if your insurance carrier tracks dependent eligibility, an employer should consider reviewing their bills to ensure it is being done correctly.  If you know a dependent is over 26 years old and he/she is still on your bill, you should check with your carrier to get the dependent removed.  Keep in mind that some states may extend the time a dependent can remain on the parent’s health plan(s). 

For example, the state of Florida allows young adults to remain on the parent’s plan until age 30 as long as the individual meets the following criteria:

• must not be married;
• must either live in Florida or be a fulltime or part-time student;
• must not have a dependent of his or her own;
• must not currently have individual or group health coverage elsewhere; and
• must not have a gap in “creditable coverage” of more than 63 days.

Check your state to ensure you comply with the law.

If coverage was continued in error an employer can’t retroactively terminate it.  If the parent has continued to pay for the premium for the dependent, then under the Affordable Care Act, the employer can only terminate their coverage prospectively.  In other words, if you discover that a dependent has been on your bill for a year AND the premiums were paid for the coverage, you can only terminate the coverage at the end of the month.

For example:  You discover on March 2^nd that a dependent should have been terminated in the prior year.  The parent had paid all premiums for the coverage.  The earliest you can terminate coverage for the dependent is March 31^st.  Assuming only one child was covered, the cost to the employer could average around $2,000 per year for the premium.  Worse, the cost of the employer’s plan could be adversely affected by the number of claims that were paid for the ineligible dependent.

Finally, an employer should make sure that COBRA Notices go out to these individuals within 14 days (44 days if you use a third party to administer your COBRA) to avoid possible lawsuits and penalties.  Failure to provide this notice may result in penalties of up to $110 per day along with possible litigation costs.

Time is not your friend when errors are made on your health insurance bills.  The longer the it takes to find and correct the problem, the more it will cost an employer.

Terminated Employees:

The last situation is the most complex and, in some cases, can be the area where an employer has the most liability.  If you discover that an employee and their covered family members should have been terminated in the past, the employer should give careful consideration on how to handle the situation.

Should the employer terminate retroactively or not, which is better?

Under the ACA, since the employee has not paid for the premium you can terminate the coverage back to the original termination date.  However, beware state laws that may not allow retroactive termination. 

For example, Texas Senate Bill 51 (SB51) requires that an employer terminate the coverage on the last day of the month that the insurance carrier is notified of the eligibility change AND must cover the cost of the coverage.  So again, an employer could be looking at thousands of dollars in premium cost as well as the impact any claims will have on the group health plan(s).

There are a few other considerations an employer needs to consider before terminating coverage retroactively. 

1. If claims have been paid, the insurance carrier may not allow you to retroactively terminate coverage.
2. Assuming the carrier allows you to terminate the coverage, if the termination of employment was more than 44 days ago, the employer could be liable for the $110 per day COBRA penalty.
3. If you need to terminate coverage more than 105 days ago (the end of the COBRA election period), some insurance carriers may not allow you to reinstate coverage, should the employee elect COBRA coverage.  This means the employer would be liable for payment of all eligible medical claims during the COBRA coverage period.

An employer can decide to terminate coverage at the end of the prior or current month when the error was discovered.  This has the advantage of avoiding possible problems with the insurance carrier (assuming they don’t question the last day worked) and COBRA penalties.  This would mean the employer would not be able to get a credit for the premiums paid and the plan would be impacted by any claims paid for the ineligible employee.  In today’s cost of health coverage, this could quickly add up to a large bite out of a company’s bottom line.

Before making any decisions, you should consult with your insurance carrier to determine the impact. 

What happens if the employer decides not to send a COBRA Notice?

Let’s say you discover a person should have been terminated over a year ago.  Surely the employee will not want to elect COBRA, so why send out a notice?  As we’ve seen, the longer the problem continues the less likely the insurance carrier may be willing to work with the employer.  So, if the insurance carrier has told you it will terminate coverage retroactive to the original termination date but won’t reinstate it should COBRA be elected the employer could be on the hook to pay COBRA claims. Why would an employer want to send out the notice and face a possible lawsuit?

The decision to not send out a COBRA Notice to avoid possible adverse repercussions could have dire consequences for the employer.  There is no limitation on when an employee can sue for their COBRA rights.  However, in absence of a Federal statute of limitations many courts will rely on the State’s statute of limitations. 

Caution should be exercised here because while some courts have put a limit, the statute of limitations may not begin until after the employee becomes aware of their rights.

Let’s look at Pankey v. Mississippi State University.  In this case, a terminated employee discovered she had COBRA rights while providing a deposition on a different litigation procedure.   She had paid medical claims because she was not aware that she could have elected COBRA.  Consequently, she was suing for damages.  Even though it was 4 years after her date of termination of employment, the court allowed her lawsuit to proceed.

Should the court rule in her favor, the employer could be liable for the medical bills she paid, her attorney fees and of course the $110 a day penalty for not providing the COBRA Notice. 

The moral to the story here is an employer should always provide the COBRA Notice regardless of when the termination of employment happened.  Otherwise it could face a lawsuit years in the future.

COBRA Penalties:

A review of the penalties and other damages an employer can face when not providing the required COBRA Notices is in order. The following penalties apply:

• The IRS may assess excise tax penalties of $100 per day (up to $200 per day if more than one qualified beneficiary from the same family is affected) for each day a plan fails to comply with COBRA. The overall limit on liability for single employer plans for failure due to reasonable cause is $500,000.  Note this does not apply to willful neglect.
• COBRA eligible individuals may sue to recover statutory penalties of $110 per day for a plan’s failure to provide the General Notice or the COBRA or Election Notice.
• COBRA eligible individuals can sue to recover expenses that would have been paid under COBRA coverage. In these cases, the employer is ultimately responsible to provide COBRA coverage if the insurance carrier or third-party administrator will not provide it.
• Other relief may be available to individuals based on a plan’s failure to provide him or her with the General Notice or COBRA Election Notice.
• The Court can award attorneys’ fees and interest to the prevailing party.

Final Thoughts…

As we’ve seen, the sooner an employer finds and corrects any errors on their health insurance bills the less it is likely to cost.  This is why we normally recommend that the best approach is to verify your invoices every month.  However, if this is not possible then quarterly would be the next best option.  When you only audit your health insurance bills annually (or longer), you’re setting up your company for costly lawsuits and penalties.  Not to mention the impact of paying for coverage and/or claims for ineligible individuals.

Documentation is key throughout the eligibility management process. 

When you add, change or terminate coverage with an insurance carrier be sure to keep documentation of the notification sent along with the date it was sent.  This will be required by most insurance carriers to correct the problem.

If it was due to your error, still keep documentation as to what happened and how you have addressed the situation.  Should a lawsuit happen, this documentation can be crucial in showing the non-compliance with COBRA was not due to willful neglect.

Keep detailed records of when the COBRA Notices are sent.  This documentation should include the date the notice was produced, the date it was mailed, how it was mailed and to what address it was sent to.  When possible have the person who actually mailed the notice verify it was sent.

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BCL Systems, Inc.

This information is educational and not meant to provide legal advice.  A legal professional should always be consulted.  This entire article is protected by Copyright and any unauthorized use is strictly prohibited.  For permission to utilize this article, please contact BCL Systems, Inc. at robinb@bclsys.com.