Personnel Division of the Administrative Services Department                                                              Phone (785) 832-3202 • Fax (785) 832-3228

Memorandum

City of Lawrence

Department of Administrative Services

 

TO:	Mike Wildgen, City Manager
FROM:	Health Care Committee David Cobb, David Hogue, Frank Reeb, Kim Brice, Lori Carnahan, Marlo Cohen, Michael Tubbs, Russell Brickell, Scott Wagner, Tammy Bennett, Terese Gorman
C:	Debbie Van Saun, Assistant City Manager Dave Corliss, Assistant City Manager
Date:	May 11, 2005
RE:	2006 Health Plan and Wellness Program Budget Proposal

 

Executive Summary

§    At this time, with only three months experience in the current plan year, we anticipate a 9% increase in monthly premium equivalents for health coverage in 2006.

§    The health care committee recommends maintaining the current design of the health plan with enhancements to certain preventive services which will likely have minimal impact on plan cost. The funding recommended for the health plan in 2006 is $6,707,913. The funding is broken down as follows:

City Contributions…………………... $5,549,030

Employee Contributions……………... $868,725

Retiree Contributions………………… $290,158

Total…………………………………. $6,707,913

§    Our funding recommendations are based on a strategy designed to allow predictable incremental increases in funding over 3-5 consecutive plan years. Under this strategy, City contributions and employee contributions would increase approximately 3% and 1%, respectively, for at least 3 plan years.

§    Therefore, we propose City contributions increase 3% or $161,622 over 2005 funding. We recommend each department budget $7,132 per full-time equivalent (FTE) and $7,801 for each new FTE added (increases over 2005 funding of $162 and $269, respectively). City contributions per retiree contract would be $1,251 (an $18 decrease from 2005 funding) totaling $72,539.

§    We also recommend that employees continue to have their health coverage fully funded by the City. We recommend that employee contributions toward monthly premium equivalents for family contracts increase 1.2% from $176.58 to $178.75, resulting in a $1.00 per pay period increase from $81.50 to $82.50.

§    We continue to recommend that retirees pay 80% of the monthly premium equivalent for their contracts. Retiree costs will increase proportionately with health plan costs.

§    The wellness program is funded separately from the health plan. The funding necessary to maintain current core wellness programs in 2006 is $19,951, a 19%, or $3,251 increase over 2005 funding. Additionally, the health care committee recommends funding $3,750 in cash incentives for participation in an annual health risk appraisal.

Detail of Recommendations

1.       The health care committee recommends maintaining the current design of the health plan with new benefits for certain preventive services. The current plan type is a preferred provider organization (PPO). The health plan encompasses comprehensive major medical (including vision), dental, and prescription drug benefits offered as a package at one combined rate or premium equivalent with out-of-pocket costs varying by benefit^[1]. Controlling the rising cost of health care is necessary to maintain our current health plan. One strategy is to promote prevention to avoid medical treatment and/or facilitate early detection. It is the health care committee’s opinion that plan members should not be forced to utilize preventive services. However, the committee supports encouraging members to utilize such services by providing incentives. Therefore, we recommend paying the following preventive services at 100% and not subjecting them to comprehensive major medical deductible and coinsurance (although subject to limitations):

a.       Annual physical

b.       Mammogram

c.       Pap test

d.       PSA test

The exact rate impact to our health plan is hard to determine. More services may be produced due to the charge being paid at 100%, yet potentially large dollar claims may be reduced due to early detection. The plan’s group consultant estimated a minimal rate impact of approximately 0.3% to expected major medical claims. This would represent an additional $13,000 in the current plan year.

2.       The committee recommends increasing City and member contributions in order to support our first recommendation. A health plan rich in benefits contributes toward the recruitment and retention of quality employees capable of fulfilling the City’s mission to provide excellent City services. The City’s health plan is market competitive in terms of covered services, deductibles, coinsurance, other elements of plan design, and employee cost. Employee contributions toward premium equivalents for family contracts beat national trends, according to findings of a 2004 Kaiser Family Foundation survey. The Kaiser survey reported that in 2004, on average, employees paid $222/month for family contracts. In 2004, City employees contributed $173/month for family contracts, approximately 28% less than national trend. Whereas nationally, employees paid 28% of the premium for the family contract, City employees paid 22%. Furthermore, during a time when employees continue to pay a greater share of their premium each year, City employees are paying less. In our recommended proposal, employees would pay 21% of the family contract premium equivalent in 2006.

3.       Our funding recommendations are based on a strategy designed to allow predictable incremental increases in funding over a limited number of consecutive plan years. Our funding recommendations are based on the work of KU Assistant Professor Justin Marlowe and Management Intern Regan Gerlt who ran several funding scenarios after collecting incurred claims data over the last ten years to then project our plan costs. Assistant Professor Marlowe simulated the probability that the various revenue funding scenarios presented would meet the health care committee’s stated objective of 25% of projected costs as a benchmark for retained earnings. His risk software provided a normal distribution of all of the possible values that health care expenses and revenues could assume. The projected expenses provided were in the 95^th percentile of overall projected costs (meaning that there is less than 5% chance that expenses for each given year will exceed the figures given). The projected revenues provided were in the 5^th percentile of their normal distribution (meaning that there is less than a 5% chance that revenues for each given year will fall below the figures given). These numbers represent a conservative budgeting ideology. Given the above, Marlowe and Gerlt recommended that the 3&1 revenue funding scenario be adopted by the health care committee (see graph below). The 3&1 revenue scenario calls for the City to contribute 3% and employees 1% for 4 consecutive years from 2006-2010. This strategy requires diligent monitoring as claims continue to be incurred and adjustments may be necessary. To do so it will be necessary to purchase the risk software and retain the consulting services of Justin Marlowe (separate line items under the Administrative Services Personnel budget request).

4.       The committee recommends funding City contributions for active employees and retained earnings equitably on a full-time equivalent (FTE) basis. This calculation is obtained by dividing City funding for active employees and retained earnings by the number of full-time equivalents. In 2006, each department should budget $7,132 per FTE.

5.       The committee recommends funding City contributions for retirees and new positions approved for the 2006 budget on a per contract basis. The retiree figure is obtained by dividing City contributions for retirees by the number of retiree contracts and is added in its entirety to the general fund. The figure for new positions is obtained by dividing City contributions for active employees and retained earnings by the number of active employee contracts. In 2006, the figures are $1,251 and $7,801, respectively.

6.       The committee recommends that employee contributions toward monthly premium equivalents for family contracts increase 1.2% from $176.58 to $178.75, resulting in a $1.00 per pay period increase from $81.50 to $82.50.

7.       The committee recommends maintaining retiree contributions toward their contracts at 80% of the premium equivalent. The following table summarizes retiree costs given a 9% increase to monthly premium equivalents in 2006.

 

8.       The health care committee recognizes that member utilization of the health plan has significant impact on plan costs. We support the efforts of the wellness committee (CHAMP) to increase awareness about health and the health care system such that employees learn to live healthier lifestyles and use their health benefits wisely. The wellness committee will continue to offer its core programs in 2006, including health risk appraisals, flu shots, health fairs with preventive health screenings, LPRD fitness-related class discounts, and corporate-rate fitness club memberships. The recommended funding for these programs is $19,951.

9.       Additional funding of $3,750 to the wellness budget is requested in order to implement a nominal cash incentive for employees that participate in an annual health risk assessment (HRA). HRAs continue to be an excellent tool to increase awareness about the connections between health and lifestyle choices. They may be an important catalyst in initiating positive behavior changes that increase well-being, health status, and productivity in the workplace, while decreasing health plan costs. The health care committee supports the wellness committee’s proposal to award $10 per employee maximum for completion of an HRA in 2006.

Review of Previous Plan Years

 

Total payments in 2004 were $4.4 million and included $40,921 in claims paid by reinsurance. BCBSKS closely projected 2004 claims at renewal in August of 2003 and anticipated nearly a 20% increase in claims from 2003 to 2004.

 

Projections for 2005 and 2006

§         At the conclusion of the first quarter in 2005, annualized paid claims are at 105% of projected claims. Such paid claims increased 12.6% from 2004 to 2005. In 2005, it is difficult to compare claims paid for prescription drug charges during the first quarter from 2004 to 2005 because the data collected from BlueCross BlueShield of Kansas (BCBSKS) is on a paid basis and that from MedTrak Pharmacy Services is on an incurred basis. We are also unable to make write off comparisons as BCBSKS uses different reporting methods than MedTrak. MedTrak did report that $366,561 were written off in the first quarter of 2005. We can illustrate administrative savings gained from carving out the drug benefit. First quarter claims paid by MedTrak for prescription drug charges total $111,697. If paid under contract with BCBSKS, administrative fees for processing each claim would have been $5,004. Additionally, charges for operating expenses and reinsurance attributed to the drug benefit would have been $9,381 for a combined total of $14,385. The City has paid MedTrak $1,292 in first quarter administrative fees, which results in a savings of $13,093.

§         We anticipate the monthly premium equivalent to increase 9% in 2006, barring high dollar claims incurred for the remainder of the current plan year. From 1996 to 2005, on average, City premium equivalents have increased 8.7% over the previous year, which is in line with national trends. Trends indicate that health care industry cost will slow somewhat, although double digit inflation rates continue to be expected.

§         Annualized first quarter data indicates that 2005 total plan cost will be approximately $5.3 million, with $4.8 million in paid claims and $500,000 in administrative fees. This is a 5.1% increase in cost from 2004 to 2005.

§         Due to an unanticipated decrease in member utilization of the health plan in 2003, the current health care retained earnings fund is very healthy and sets the stage for the funding strategy recommended by Marlowe and Gerlt. Without this high level of retained earnings, we would be funding double-digit trend increases each year (as we have in the past). In the long term, the higher retained earnings balance will allow the plan to spread out the rate of increase for annual funding over multiple years while being able to withstand years of extremely high claims utilization. In the short term, these retained earnings will likely help the City ease into the new GASB accounting and funding requirements, which will take effect within the next twenty months.

 

As the table illustrates, 2005 average contract costs are projected at $7,053. We anticipate a 10.3% increase to $7,778 from 2005 to 2006.

 

2005 and 2006 Health Care Committee Agenda

1.       Submit Request for Proposal (RFP) for the administration of the comprehensive major medical and dental portions of our health plan for the 2006 plan year to third-party administrators, insurance carriers, and reinsurers. The intention of the RFP is to ensure our BCBSKS contract is competitive. However, if the committee decides to change vendors, the remainder of 2005 will be spent preparing for that transition.

2.       Plan to meet April 2006 deadline for compliance with the HIPAA Security Rule.

3.       Research the requirements of GASB regarding compliance in accounting for and funding retiree health plan benefits and prepare to meet that deadline.

4.       Purchase risk software to develop budgeting strategies and retain consulting services of Justin Marlowe, Assistant Professor of Public Administration.

5.       Comprehensive review including revisions to Summary Plan Document.

6.       Review pre-tax employee savings accounts to be used for medical expenses incurred during retirement.

If you have any questions, please call Frank Reeb or Lori Carnahan. As always, the committee would be happy to have you join us at our next meeting to discuss any of the items contained in this document along with any other concerns you may have regarding the health plan.

Attachment A

Health Care Committee Ongoing Goals and Objectives

Attachment B

2006 Budgeting Spreadsheet

Attachment C

2006 Funding by Department based on FTE

Attachment A

Health Care Committee Ongoing Goals and Objectives

 

The City of Lawrence Health Care Committee was formed in 1998 to develop guidelines regarding annual funding and plan design. Since 1998, on an annual basis, the Health Care Committee has devoted time to review, revise, and refine those guidelines according to City Commission directives and input from City management and employees.

 

The City of Lawrence Health Care Committee is chaired by the Personnel Manager, Administrative Services, and consists of City employees from each department. The objectives of the Health Care Committee are:

 

1.       To submit annual budget recommendations to the City Commission regarding funding for the health care plan;

2.       To review, evaluate, and determine plan design;

3.       To identify, review, and address utilization trends;

4.       To monitor current national health care trends;

5.       Through partnership with the Wellness Committee (CHAMP), provide health education and wellness interventions to employees and their immediate family members so that they might fulfill their responsibilities as covered plan participants.

 

Statement of Plan Participant Responsibilities

 

While it is the right of plan participants to use the Plan to the fullest, and to take advantage of everything it offers, it is also their responsibility to maximize healthy habits, to become knowledgeable about his or her health plan coverage, and to consume health care services in a responsible manner in order to reduce his or her lifetime cost for health care coverage.

 

Annual Funding Guidelines

[m1] 

Annual budget recommendations will be submitted to City management in May for the next plan year using the most current national industry cost trend projections available at the time.

 

City funding means annual funding. Employee contributions mean payroll deductions for health care premiums.

 

The City will fund health care on a per contract [m2] basis.

 

Recommended levels of 25% of projected costs will be maintained in retained earnings for at least one year beyond the year for which the budget is being prepared. Retained earnings fund the cost of catastrophic claims, which is defined by the claims administrator as 120% of projected expenses. Interest earned on retained earnings will be used to offset the budget request to fund retained earnings.

 

The City will fully fund the monthly premium equivalent of a single membership for employee coverage. The City will fund an equal dollar amount toward the monthly premium equivalent for a family membership.

 

The cost to cover eligible dependents under the health care plan is the difference between the monthly premium equivalent for a family membership and the monthly premium equivalent for a single membership.

 

To keep revenues proportional between City funding and employee contributions, the City will contribute 55-75% of the funding necessary to generate revenue toward the cost of dependent coverage; the employee will contribute 25-45%. Ideally, revenues will be split 65/35 between the City and employees toward the cost of dependent coverage.

 

Eligible employees receiving a retirement or disability benefit through KPERS will pay 80% of the monthly premium equivalent for their health care membership. The City will fund the remaining 20%.

 

COBRA participants will pay 102% of the monthly premium equivalent for their health care membership.

 

The Health Care Committee will work to moderate increases in City funding and employee contributions in order to smooth out the peaks and valleys of actual health care consumption. When increases in health care utilization have depleted retained earnings for future years below recommended levels, changes regarding retained earnings funding parameters will be implemented. When decreases in health care utilization are maintained for multiple years, the health care committee will recommend plan design enhancements[m3] .

 

Plan Design Guidelines

 

The largest component of the City of Lawrence employee benefit package is the health care plan. It serves as a recruitment and retention tool. To attract potential employees, and keep current ones, the health care plan must be market competitive in terms of employee cost (i.e. insurance premiums, deductibles, coinsurance, and out of pocket maximums) and the level of benefit provided (scope of covered services).

 

Covered services under the health care plan should satisfy the needs of the majority of employees, which can be identified by annually collecting aggregate data through:

 

1.       Wellness tools;

2.       Health care plan utilization reports;

3.       Disability and worker’s compensation claims; and

4.       Periodic employee surveys.

 

Ideally, the plan design should enable plan expenses to be at or below national industry cost trends. This will be accomplished in part by:

 

1.       Maintaining a plan design that enables and encourages plan participants to make wise consumer choices;

2.       Maintaining a plan design that enables and encourages plan participants to utilize preventative services;

3.       Educating plan participants on how to be wise consumers of health care services; and

4.       Through the Wellness Committee, offering intervention programs employees can use to individually examine and improve their overall lifestyle.

 

Final decisions on plan design will be made in September for the upcoming plan year.

 

Attachment B	2004	2005 Projected	2005 Worst Case	2006 Projected	2006 Worst Case	Change from 2005-2006
Total City Contributions	$ 4,829,019	$ 5,387,408	$ 5,387,408	$ 5,549,030	$ 5,549,030	$ 161,622	3.0%
Single Contracts/Emp				$ 1,077,949
Family Contracts/Emp				$ 1,788,696
All Contracts/Retiree				$ 72,539
Retained Earnings				$ 2,609,846
Active Employee Contributions	$ 849,984	$ 858,195	$ 858,195	$ 868,725	$ 868,725	$ 10,530	1.2%
Retiree Contributions	$ 253,157	$ 266,154	$ 266,154	$ 290,158	$ 290,158	$ 24,004	9.0%
COBRA	$ 27,015
Interest on Investments	$ 57,047
TOTAL REVENUES	$ 6,016,222	$ 6,511,757	$ 6,511,757	$ 6,707,913	$ 6,707,913
Claims paid by Plan	$ 4,423,085	$ 4,789,290	$ 5,747,148	$ 5,220,326	$ 6,264,391
Claims Admin.	$ 195,853	$ 194,266	$ 257,472	$ 233,871	$ 280,645
GOE/Reinsurance	$ 479,655	$ 376,875	$ 376,875	$ 456,777	$ 456,777
TOTAL EXPENSES	$ 5,098,593	$ 5,360,431	$ 6,381,495	$ 5,910,973	$ 7,001,813
NET INCOME	$ 917,629	$ 1,151,326	$ 130,261	$ 796,940	$ (293,899)
Beg Retained Earnings	$ 1,992,534	$ 2,921,722	$ 2,921,722	$ 4,073,048	$ 3,051,983
End Retained Earnings	$ 2,921,722	$ 4,073,048	$ 3,051,983	$ 4,869,987	$ 2,758,084
PREMIUM EQUIVALENTS
Individual	$ 257.28	$ 261.74		$ 285.30
Family	$ 776.21	$ 781.21		$ 851.52
CLAIMS REPORT
Claims Pd. By Stop Loss	$ 40,921.00
Total Claims Pd ( Inc. Stop Loss)	$ 4,464,006
Aggregate Stop Loss Limit	$ 5,305,699
BCBS RENEWAL DATA	100.96%
Projected claims	$ 4,421,391
Worst Case Claims (120%)	$ 5,305,669
Projected Total Plan Costs	$ 5,103,168
Worst Case Total Plan Costs (120%)	$ 6,027,062
TOTAL  # CONTRACTS		760		760
Emp. Single Contracts		288		288
Emp. Family Contracts		414		414
Retiree Single Contracts		33		33
Retiree Family Contracts		25		25
MONTHLY CONTRIBUTION
Single Contract/Emp		0		0
Family Contract/Emp		$ 176.58 ($ 81.50)		$ 178.75 ($ 82.50)
Single Contract/Retiree		$ 209		$ 228
Family Contract/Retiree		$ 625		$ 681
COBRA Single		$ 266.97		$ 291.00
COBRA Family		$ 796.83		$ 868.55

 

 

 

[1] Comprehensive Major Medical Deductible $300/$600 Coinsurance 80%/20% to Maximum $300/$600

Dental Coinsurance Basic 80% Supplemental Primary 50% Prosthodontics 50% Periodontics 80%

Prescription Drug Deductible $100/$200 Coinsurance 80%/20% to Maximum $500/$1000