DEPENDENT ELIGIBILITY VERIFICATION

Audit Analysis Report

February 14, 2011

 TABLE OF CONTENTS

EXECUTIVE SUMMARY ...................................................................................................................................... 3

Verification Objectives........................................................................................................................ 3
Verification Methodology .................................................................................................................... 3
FINANCIAL IMPACT ANALYSIS ......................................................................................................................... 4
Benefit Cost Reduction ....................................................................................................................... 4
Project Return On Investment ............................................................................................................ 4
VERIFICATION POPULATION ANALYSIS .......................................................................................................... 5
Participant Enrollment Method ............................................................................................................ 5
Participant Benefit Status ................................................................................................................... 6
Dependent Relationship Type ............................................................................................................. 6
Dependent Age Band ......................................................................................................................... 8
PROJECT OPERATIONS ................................................................................................................................... 10
Communications .............................................................................................................................. 10
Project Activity ................................................................................................................................ 11
Issues Managed .............................................................................................................................. 12
CONCLUSION AND RECOMMENDATIONS ....................................................................................................... 14
Dependent Eligibility Verification - Significant Findings ........................................................................ 13
Dependent Elgibility Managent Post Audit Recommendations............................................................ 13

2
 Dependent Eligibility Verification
_____________________________________________________

Executive Summary
In December 2009, the North Carolina State Health Plan (State Health Plan) and Secova initiated the process
of verifying the eligibility of all dependents enrolled in the State Health Plan. Project planning activities
began in January, 2010 but the first project mailing was delayed to the beginning of August to allow the
State Health Plan to complete its annual enrollment in the spring and provide current eligibility data to
Secova. The State Health Plan decided to modify its existing dependent eligibility rules to reflect changes
under recent North Carolina legislation, specifically the elimination of student status for overage dependent
children and the addition of legal guardianship as an approved dependent category. Compliance was
confirmed by audit participant submission of specific verification documentation for each of their enrolled
dependents. State Health Plan coverage was cancelled for enrolled dependents through voluntary
disenrollment or when the required documentation was not provided by the audit participant.

VERIFICATION OBJECTIVES

Communicate to all State Health Plan participants the process that will be implemented to determine
dependent eligibility

Educate participants about the eligibility rules of the State Health Plan so that only eligible
dependents are covered

Request, collect, and retain eligibility verification documentation from State Health Plan participants
with enrolled dependents

Provide the State Health Plan with benefit cost reductions through coverage cancellation of
dependents who do not comply with eligibility compliance requirements

Verification Methodology

The methodology behind dependent eligibility verification is to collect documentation on all dependents
enrolled in a fair, accurate, and speedy manner. For the State Health Plans verification project,
documentation was collected and reviewed on all enrolled dependents to ensure equity among all
participants.

One of the important success factors for the project was the providing of clear and consistent
communications to each participant explaining the documents that were necessary to verify dependent
eligibility and the deadline for submitting these documents. By employing multiple outbound contacts using
various methods (letters, phone calls, and emails), 24/7 inbound call center services, and online compliance
advocacy support, The State Health Plan was assured that audit participants had sufficient notification,
support, and time to submit the required documentation.

Another important component to the success of the verification initiative was clearly communicating the
value shared to both benefit participants and The State Health Plan by ensuring that only eligible
dependents are enrolled in State plans. By verifying coverage eligibility and then removing ineligible
dependents, the State Health Plan clearly demonstrated its commitment to sound fiscal management of
benefit costs for the State or North Carolina and all plan participants.

3
 Financial Impact Analysis

BENEFIT COST REDUCTION

8726* non-verified dependents were removed from the State Health Plan population during the Dependent
Eligibility Verification project. Since dependents typically remain enrolled in benefit plans an average of five
(5) years, the State Health Plans projected (5) five year cost per dependent was used to calculate the
estimated benefit cost reduction presented in the table below:

Non -
Enrollment Verified 5 year Average 5 year Cost Reduction
Method Dependents Cost Per Dependent Projection
Beacon 2410 $19,595 $47,223,950
Benefit Focus 5641 $19,595 $110,535,395
Paper 675 $19,595 $13,226,625
Total 8,726* $19,595 $170,985,970
*As of January 7, 2011. Total non-verified dependents do not reflect coverage reinstatements after this date.

PROJECT RETURN ON INVESTMENT

Dependent Eligibility Verification Project Cost

State Health Plan Enrolled Dependent Population 179,687

Project Fee per Dependent $6.97

Total Project Cost $1,252,418

137:1 Project Return On Investment (ROI)

The $1,252,418 Dependent Eligibility Verification project cost, compared with the $170,985,970 five (5) year
benefit cost reduction projection realized a 137:1 project ROI for the North Carolina State Health Plan.

4
Analysis of Savings from Dependent Verification Audit
Certified by Aon for the State Health Plan

Number of Dependents Removed: 7,133

Average FY 2010 Cost PMPM (1) $ 152.25

Projected FY 2011 Cost PMPM (2) $ 166.71
Projected FY2011 Reduced Cost (December June) $ 8,323,990

Average Contribution Decrease per dependent retrotermed (3) $ 127.55

FY2011 Contribution Decrease (December June) $ 6,368,643

Recoveries as of January 25, 2011 $ 109,687

$ 1,252,384
Audit Fees

Projected FY 2011 Net Savings (December June) $ 812,651

Projected FY 2012 Net Savings (4) $ 3,670,466
Projected FY 2013 Net Savings (4) $ 4,019,160

(1) Based on FY2009 and FY 2010 average claims for dependents retrotermed
through the audit
(2) Cost trended at 9.5%
(3) Based on FY2011 contributions by tier and actual tier movement
(4) Cost and Contributions trended at 9.5%

5
 Verification Population Analysis
For the period of July 30, 2010 through December 15, 2010, 179,6871 enrolled dependents from 97,664
participants were subject to eligibility verification. After adjusting for normal attrition (dependent coverage
cancellation that occurred as a result of participant terminations or qualifying events resulting in a
participant-only status), the original audit population was reduced to 174,172 enrolled dependents from
94,444 active participants or 97% of the original dependent population.

Over a period of 20 weeks, 94.99% of the enrolled State Health Plan dependent population was confirmed
eligible for coverage. The overall dependent non-verification rate for the project was 5.01%. A total of
8,726 enrolled dependents were determined ineligible for coverage during the project. 2,493 or 29% of the
total ineligible dependents were voluntarily reported ineligible by the plan participant. 6,233 dependents or
71% of the total ineligible dependents could not be verified because no documentation was received or the
documentation which was submitted by the plan participant was insufficient to confirm coverage eligibility.
The pie chart below compares the total verified dependents with both the voluntary non-verified and
incomplete/non responder dependents identified during the verification project.

Voluntary Non
Verified, Verified,
94.99% 1.43%

Incompletes/Non
Responders,
3.58%

North Carolina State Health Plan: Dependent Eligibility Verification

PARTICIPANT ENROLLMENT METHOD

The table below compares the total verified and non-verified dependents identified during the verification
project the various methods of enrolled used by State Health Plan participants.

Enrollment Total Total verified Total Non-Verified

Method Enrolled Count % Count %
Beacon 33414 31004 92.79% 2410 7.21%
Benefit Focus 130691 125050 95.68% 5641 4.32%
Paper 10067 9392 93.29% 675 6.71%
Total 174172 165446 94.99% 8726 5.01%

1
Five dependents were inactivated at the close of the audit at the State Health Plans direction.

6
PARTICIPANT BENEFIT STATUS
The chart below shows the breakdown of non-verified dependents by project participant status identified as
voluntary or involuntary during the project.

Participant Total Non-

Benefit Total Voluntary Involuntary Verified
Status Enrolled Non-Verified Non-Verified Count %
Active 155235 2115 5498 7613 4.90%
COBRA 488 6 135 141 28.89%

Retired 18449 372 600 972 5.27%

Total 174172 2493 6233 8726 5.01%

DEPENDENT RELATIONSHIP TYPE

As Secova received participant verification documentation, several specific dependent types were identified
within the general child classifications. The first table represents pre-audit initial classifications for the
enrolled population, and the second table post-audit classifications for the verified population. The
difference in the total dependent counts between the two tables is due to dependents determined to be
ineligible during the verification.

Enrolled Dependent Relationship Original Dependent Count

Child 128,483
Spouse 45,689
Totals: 174,172

Post Audit Dependent Classification Final Dependent Count

Child - Adopted 1,913
Child - Adopted - Dependent 19-26 387
Child - Biological 93360
Child - Biological - Dependent 19-26 20951
Child - Court Order 630
Child - Court Order - Dependent 19-26 48
Child - Legal Guardianship 176
Child - Legal Guardianship - Dependent 19-26 38
Child - Other (Disabled Dependent) 756
Child - Other (Exception Processing) 35
Child - Stepchild 2198
Child - Stepchild - Dependent 19-26 728
Spouse - Legally Married 44,225
Spouse - Other (Exception Processing) 1
Total 165,446

7
Upon examination of the non-verified dependent population by relationship type, the following
determinations were made:

 Child Dependents comprised 73.77% (128,483 child dependents) of the total enrolled population and
83.23% of non-verified dependents (7,623 non-verified child dependents out of 8,726 total non-
verified dependents). A total of 5.65% (7,263 out of 128,483) of enrolled child dependents were
determined ineligible.

 Spouses accounted for 26.23% (45,689 spouses) of the enrolled population and 16.77% of the non-
verified group (1,463 non-verified spouse dependents out of 8,726 total non-verified dependents). A
total of 3.20% (1,463 out of 45,689) of enrolled spouse dependents were determined ineligible.

Prior to the verification process, the dependent to participant ratio was 1.84 (179,682 / 97,662). Post
verification, the ratio had fallen to 1.75 (165,446 / 94,444).

Non-Verified Dependent Analysis by Relationship Type

174,172 Enrolled Dependents 8,726 Non-Verified Dependents

Voluntary
Spouse Disenrollment, 30.14%
Enrolled- 45,689
Non-Verified -1463 Incomplete/Non-
Non-Verified% - 3.20% Responders, 69.86%

% of Total Non-
verified, 16.77%

Child Voluntary
Enrolled - 128,483 Disenrollment, 28.25%
Non-Verified - 7263
Non-Verified% - 5.65% Incomplete/Non-
Responders, 71.75%

% of total Non-
verified, 83.23%

North Carolina State Health Plan for Teacher and State Employees: Dependent Eligibility Verification Project
Analysis of Verification System Data as of 01/07/2011

174,172 Enrolled Total Includes : 165,446 Verified 8,726 Non-Verified

8
DEPENDENT AGE BAND

Two dependent age groups realized significantly higher ineligible rates than the rest of the population:

 Dependents 19 - 25 years of age represent 31.81% of the total non-verified population. Moreover,
10.09% of all enrolled dependents in this age band were determined to be ineligible, despite the
elimination of any student documentation requirement. Approximately 91% of those coverage
suspensions were involuntary, largely due to no documentation being received from the participants
on those dependents.
 Dependents 26 35, while representing only about 2% of the enrolled population had a non-verified
rate of 10.46%, again significantly higher than the 5.01% overall rate. As 56% of ineligible
dependents in this age band were voluntarily identified by participants, we know that many ex-
spouses were being covered in violation of State Health Plan rules.

9
 Non-Verified Dependent Analysis by Age Band
174,172 Enrolled Dependents 8,726 Non-Verified Dependents

Voluntary
65+ Disenrollment, 28.14%
7,806 Enrolled
295 Non-Verified Incomplete/Non-
(3.78%) Respondents, 71.86%
% of Total Non-
Verified, 3.38%

Voluntary
56 - 64 Disenrollment, 20.88%
14,880 Enrolled
249 Non-Verified Incomplete/Non-
(1.67%) Respondents, 79.12%
% of Total Non-
Verified, 2.85%

Voluntary
46 - 55 Disenrollment, 32.37%
11,674 Enrolled
346 Non-Verified Incomplete/Non-
(2.96%) Respondents, 67.63%
% of Total Non-
Verified, 3.97%

Voluntary
36 - 45 Disenrollment, 35.52%
8,304 Enrolled
411 Non-Verified Incomplete/Non-
(1.72%) Respondents, 64.48%
% of Total Non-
Verified, 4.71%

Voluntary
Disenrollment, 56.36%
26 - 35
3,833 Enrolled Incomplete/Non-
401 Non-Verified Respondents, 43.64%
(10.46%) % of Total Non-
Verified, 4.60%

Voluntary
19 - 25 Disenrollment, 54.07%
27,504 Enrolled
2,776 Non-Verified Incomplete/Non-
(10.09%) Respondents, 45.93%
% of Total Non-
Verified, 31.81%

Voluntary
<19 Disenrollment, 8.78%
100,171 Enrolled
Incomplete/Non-
4,248 Non-Verified
Respondents, 91.22%
(4.24%)
% of Total Non-
Verified, 48.68%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

North Carolina State Health Plan for Teachers and State Employees: Dependent Eligibility Verification
Analysis of Verification System Data as of 01/07/2011

174,172 Enrolled Total Includes : 165,446 Verified 8,726 Non-Verified

10
 Project Operations
COMMUNICATIONS

Participant communications were designed to achieve the required compliance response rates throughout
the project. The State Health Plan and the Secova project teams collaborated to develop concise participant
correspondence that communicated the importance of responding to the verification compliance requirement
using easy to understand instructions and a shared value message. Secova produced and distributed various
correspondences to State Health Plan participants and made outbound phone calls to non-responsive
participants as well as individuals who provided incomplete compliance submissions:

In advance of participant communications release, the Segal Company helped the State Health Plan
design Annual Enrollment communications beginning in January which was utilized to announce the
dependent verification during the 3/15 4/9 enrollment period. The Whats New in 2010 section
introduced the upcoming verification and Secova as the plans administrator, along with current
dependent eligibility rules. Segal also helped design a press release issued by the State Health Plan
which was released in July, announcing the project. After participant communications were released,
Segal drafted a weekly update provided to the plans Health Benefit Representatives once the
verification began.

Participant communications were distributed by Secova upon formal commencement of the

compliance audit:

 7/30/10 8/12/10 Verification Packet was mailed to more than 97,000 plan participants
with dependents, beginning with retirees.

 8/30 9/7 Reminder Packet was mailed to participants who had yet to respond to the
original mailing

 9/8 Secova initiated outbound calls to participants in a no response and incomplete status,
reminding them of the 10/15 document submission deadline. Almost 83,000 calls were made
to participants over the course of the verification.

 11/11 Secova mailed a Suspension of Coverage letter and Appeals Form, and Blue Cross
Blue Shield (BCBS) began terminating dependents from the plan who had not been verified
by participants.

In response to participant submissions, the following determination notices were issued by Secova:

 A Receipt of Documents email within 24 hours of documents being received and indexed by
Secova, notifying participants documents were being processed and formal determinations
would be issued within 10 business days

 A 7 Day Reminder Email sent every 7 days after the online submission of the Verification
Form until the participant submitted additional documentation

11
  An Incomplete Letter detailing documents received and the specific reasons those
documents were not sufficient to verify one or more dependents, with instructions for
participants on how to complete their submission. More than 23,000 incomplete letters were
sent over the course of the project.

 A Confirmation Letter mailed upon the participants completion of dependent verification

and listing the status of all enrolled dependents. More than 94,000 confirmation letters were
sent over the course of the project.

 Secova also reprinted and sent more than 10,000 cover letters and packets to participants
who indicated they needed another one.

In addition to communications originated by Secova, weekly listings of participants in a no

response/incomplete status were delivered to the State Health Plan for follow-up with those
participants.

PROJECT ACTIVITY

The Reminder and Suspension of Coverage Letters produced the highest volumes of inbound calls and
document submissions, which is normal project experience. Participant advocacy support and document
processing remained active from July 30 through December 15, 2010.

6,000

5,000

4,000

3,000

2,000

1,000

12
ISSUES MANAGED

The verification and reminder letter mailings were staggered over a 10-day period to allow for a
more even flow of incoming telephone contact and document submission. An additional two weeks
was added to the verification period up front to ensure all participants had at least eight weeks to
submit the required documentation.

Because of the geography of the State Health Plan across such a wide range of agencies and
functions, a series of training webinars were conducted for the Health Benefit Representatives in the
week preceding the verification mailing. In all, 395 HBRs received webinar invitations. Of those, at
322 attended at least one training session to become familiar with the scope of the project and learn
how they could assist in communication efforts with participants.

The majority of participant complaints registered with the State Health Plan focused on the
compliance requirement itself and/or why the State Health Plan selected an outside vendor to
administer it. The Suspension of Coverage letter mailed on November 11, 2010 announcing the
appeals period produced significantly higher call volume in a single day which resulted in increased
participant complaints for that day. Secova brought in additional staff over the following days to
enhance participant support. During the entire project, Secovas call center performance exceeded all
service level commitments made to the State Health Plan.

The State Health Plan and the Secova project teams met weekly throughout the audit to review project
status, address outstanding issues, and discuss next steps. From the first day of project implementation and
continuing through completion, critical contributions and substantial efforts were made by participants of the
State Health Plans team to ensure the ultimate success of the project. Secova would like to formally thank
the following project team participants for their invaluable insight, guidance, and supportive participation
throughout the Dependent Eligibility Verification project:

State Health Plan

Jack Walker
Linda Forsberg
Caroline Smart
Rita Sandoval
Jane Schairer
Charles Winkler
Greg Moore

Blue Cross Blue Shield of North Carolina

Judy Poe
George King
Carol Sutton
Deborah Medlin
Kristen Zuco
Taffy Jones

Segal Company
Laura Cochran
Nenette Kress

13
 Conclusion and Recommendations
Dependent Eligibility Verification Significant Findings

Secovas analysis of the State Health Plan dependent population determined the following:

Active and retiree participants had nearly identical non-verified percentages, 4.90% and 5.27%
respectively

By enrollment method, Benefit Focus, Beacon, and Paper all were in the normal range of non-verified
dependents. Benefit Focus, the largest group by far, had the lowest percentage at 4.32%.

Adopting eligibility rule changes resulting from the passage of the Patient Protection and Affordable
Care Act in March of 2010 allowed the State Health Plan to measure dependent verification results
that will be meaningful going forward:
Children 19-25 years of age were eligible without a student credit requirement
Children for whom legal guardians were now covered

Need for continual compliance education communications about The State Health Plan dependent
eligibility plan rules:
Approximately 40% of the all non-verified dependents were identified voluntarily by
participants once they were presented with the eligibility rules.

Dependent Eligibility Management Post Audit Recommendations

Based on the audit findings and a five-year benefit cost reduction projection of $170,985,970, Secova
recommends that a comprehensive Dependent Eligibility Management (DEM) program be implemented by
the State Health Plan to continuously control benefit plan access to eligible dependents and ensure
continued financial and fiduciary protection of State benefits:

Request all State Health Plan benefit participants with enrolled dependents to annually attest to the
eligibility of every enrolled dependent.

Request, collect, audit, and maintain the required eligibility verification documentation from all
benefit participants requesting a new dependent enrollment in the State Health Plan.

Recertify on a scheduled basis the eligibility verification documentation for the following dependents
enrolled in the State Health Plan:
 Children over 19 years of age every year (until 2014 to ensure they are not eligible for
benefits outside of the State Health Plan)
 Spouses every 3 to 5 years

Develop and maintain an ongoing dependent eligibility compliance education program that addresses,
at a minimum, the verification for life events specific to child dependents.

14
 SECOVA, INC.
5000 Birch Street
Suite 300, East Tower
Newport Beach, CA 92660
1.800.257.0011

www.secova.com

15