CalPERS is moving to strike from government health care rolls tens of thousands of people it believes are mistakenly or fraudulently receiving benefits.
The fund, which is the second-largest health care purchaser in the nation after the federal government, figured last year that removing an estimated 29,000 wrongly listed children, spouses and domestic partners of government employees would save approximately $40 million annually.
But early returns from an amnesty program launched last month indicate the savings may double that early appraisal. And one industry expert said CalPERS may have underestimated that 4 percent of the 739,000 dependents now on CalPERS' medical plans don't qualify for coverage.
"Based on our experience, that 29,000 is a very conservative number," said Karen Frost, a benefits administration expert at human resources firm Aon Hewitt. The global company has audited insurance eligibilities of nearly 10 million people in both public- and private-sector medical plans.
Most ineligible dependents wind up on insurance rolls because of honest mistakes, experts say.
In many of those cases, children aren't dropped when they should be, currently at age 26. Employees sometimes mistakenly continue covering spouses and ex-domestic partners who don't qualify as dependents even if a court orders they must receive continued medical coverage. Ex-stepchildren aren't eligible, either.
For the last decade, more and more employers both public and private have been using relationship verification to weed out people they never intended to cover, Frost said, and then follow up with regular audits.
CalPERS spends $7 billion annually on health care for 1.4 million state and local government employees, retirees and their families. The system has been spot-checking health insurance enrollments for individual departments and local agencies since at least 2006, system spokesman Bill Madison said.
The new process will require verification of every dependent on CalPERS' rolls. The agency expects the state's human resources department and local governments "will take steps to ensure dependents enrolled in our health plans are eligible," Madison said, "as will CalPERS."
The law allows the system and government employers who purchase medical coverage through it to drop anyone who shouldn't be receiving medical benefits and retroactively recover costs.
CalPERS last month sent 390,000 letters to health subscribers carrying dependents on their plans, asking them to voluntarily drop ineligible beneficiaries by June 30.
After that, members will have to send documents proving their dependents' eligibility and could face penalties if they can't.
"If we discover ineligible dependents during the verification period or if you fail to provide appropriate documentation for eligible dependents," the letter said, "those dependents will be removed from your health plan and you may be liable for health care costs incurred for them."
Employees and retirees can't lose their own coverage for putting unqualified friends or family on their insurance. "We do not have the legal authority to do that," said Doug McKeever, chief of CalPERS Health Policy Research Division.
And while the law allows insurers to go after subscribers who fraudulently add ineligible dependents to their health insurance, they rarely do.
The University of California last summer found that 5 percent of dependents shouldn't be on their employees' plans. Removing them saved the system $35 million.
The UC system didn't offer amnesty, said spokeswoman Shelly Meron, and it didn't impose penalties on any employees with ineligible dependents on the rolls.
Recouping months or years of premiums paid by employers for ineligible dependents can be a difficult exercise, said Frost, the Aon Hewitt's eligibility expert.
"We see very few employers do that, less than 5 percent," Frost said. "It's just a very messy process to look retroactively and figure out the point at which someone should never have been covered."
And proving fraud can be a high bar to clear, said Dennis Jay, executive director of the Washington, D.C.-based Coalition Against Insurance Fraud.
"Most systems give the benefit of the doubt," Jay said. "For example, if someone gets divorced and keeps the ex-spouse on the plan when they shouldn't have, that's pretty innocent stuff."
CalPERS spokeswoman Rosanna Westmoreland cited a law that makes it a crime to improperly obtain a benefit – including health insurance – by making a false statement. Anyone convicted of that misdemeanor may be liable for paying reparations.
"So, if CalPERS discovers fraud as part of the audit, it will refer these matters to the appropriate district attorney for prosecution," Westmoreland said, and the system will seek restitution as part of sentencing.
Since launching the amnesty period last month, CalPERS subscribers have voluntarily removed 1,650 ineligible dependents. Of those, 1,220 were on state plans. School district employees and other public agency workers dropped a combined 430.
Their insurance costs averaged $4,400 per person per year – twice the sum CalPERS originally estimated – and equals $7 million in savings.
There's no doubt that many more ineligible dependents will turn up during the verification process, Frost said.
"The people abusing the system will think, 'I'll just keep my dependent covered for a while and wait until they catch up with me,' " Frost said. "The rest will honestly think, 'I'm not doing anything wrong, so I'll just ignore it.' "
Once the amnesty period ends next month, New York-based HMS Solutions will begin verifying dependent eligibility using documents such as joint tax returns or birth certificates that CalPERS will require subscribers to submit.
CalPERS has never audited its insurance rolls, so it had no history to lean on when it estimated roughly 4 percent of enrolled dependents aren't qualified for benefits. It used the experience of other public agencies such as the University of California and Alabama's state retirement system.
But the percentage can run much higher. In 2008, Milliman Inc. conducted an audit for an 8,000-employee firm. About 6,000 had dependents on the company health plan, employee benefits specialist Penny Plante wrote in a company article, and nearly 18 percent of them were ineligible.
Aon Hewitt "has seen results on the low end of 3 percent dropped and on the high end 30 percent dropped," Frost said. "In the vast majority of cases, people just don't understand the rules."