Memorandum
City of Lawrence
Administrative Services Department
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TO: |
Mike Wildgen, City Manager
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FROM: |
Frank Reeb Lori Carnahan Marlo Cohen Health Care Committee
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CC: |
Debbie Van Saun, Assistant City Manager Dave Corliss, Assistant City Manager
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Date: |
September 15, 2005
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RE: |
2006 Health Plan Contract Renewal Report
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The City’s administrative services only (ASO) contract with Blue Cross Blue Shield of Kansas (BCBSKS) is renewed on an annual basis. This summer, we retained RJ Dutton, Inc[1] to market our health plan (excluding the prescription drug benefit) through the RFP process to third-party administrators, networks, and reinsurers, including BCBSKS, to ensure that our current arrangement is competitive. Several competitive proposals were received from the 45 vendors requested to respond. The Final Report prepared by RJ Dutton is available for review in Personnel and a copy of the Executive Summary is included with the memo. Included in this memo are recommendations that evolved from that process for the 2006 plan year, the highlights of which are bulleted below:
§ We recommend continuing with BCBSKS for administration of comprehensive major medical and dental benefits and MedTrak Pharmacy Services for administration of prescription drug benefits.
§ We recommend increasing employee contributions for dependent coverage by $1.00 per pay period, to $82.50, beginning with the first full pay period in 2006 (pay date 01/27/06).
§ We recommend that retirees continue to pay 80% of the monthly premium equivalent for their coverage. Therefore, the monthly rate for single coverage, including dental, would increase $12 to $221. The monthly rate for family coverage, including dental, would increase $36 to $661.
§ We recommend increasing the specific (individual) reinsurance coverage from $75,000 to $100,000 and removing dental from both the aggregate and specific reinsurance coverage.
§ We recommend to continue negotiating with BCBSKS the following three points:
a) New preventive benefits;
b) A more comprehensive reporting package to be included in the BCBSKS renewal contract; and
c) The processing of run-out claims in the renewal contract with BCBSKS.
1. BCBSKS submitted an excellent renewal well within what was budgeted for 2006. A reduction in claims administration charges offset by an increase in reinsurance charges resulted in a cost neutral renewal for administrative services.
BCBSKS has lowered their general operating expenses through improved internal processes resulting in more efficient operations. As a result, BCBSKS reduced their 2006 claim administration rates by approximately $23,685. Of note, they also reduced their weekly charge for claims processing from 4.48% to 3.92%. This is the first such reduction in administrative charges the City’s health plan has seen in at least 10 years.
Reinsurance rates are dependent upon claims experience. Although these rates are increasing in 2006, they are still financially competitive with other reinsurers’ rates that were quoted during the RFP process.
We feel that it is reasonable and fair to renew the City’s contract with MedTrak Pharmacy Services for a second year as MedTrak has, to date, satisfactorily administered the City’s prescription drug benefit from both administrative and employee perspectives. MedTrak is holding administrative charges constant in 2006. Additionally, we are eager to ascertain whether their letter campaign has a positive effect on plan participant behavior by encouraging the purchase of less expensive but equally effective and safe prescription drugs. In their experience, behavior is most influenced after the second and/or third letter campaign, which will take place in the second contract year for most City employees.
2. In 2006, medical and dental claims are projected to increase 8.8%; prescription drugs claims, 6.7%, with a resulting 5.9% increase in premium equivalents as shown in the table below:
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2005 |
2006 |
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Single |
Family |
Single |
Family |
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Medical/Dental |
220.09 |
664.59 |
$231.78 |
$700.24 |
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Prescription Drugs |
41.65 |
116.62 |
$45.33 |
$126.92 |
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Total |
261.74 |
781.24 |
$277.11 |
$827.16 |
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Table 1: Comparison of Current Plan, ’06 Budgeted Plan, and ’06 Projected Plan |
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2005 YTD Annualized |
2006 Budget |
2006 Renewal |
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City Funding |
5,287,932 |
5,549,030 |
5,549,030 |
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Employee Funding |
852,144 |
868,725 |
868,725 |
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Retiree Funding |
290,158 |
281,351 |
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Total Funding |
6,449,334 |
6,707,913 |
6,699,107 |
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Total Expenses |
4,784,144 |
5,910,973 |
5,487,394 |
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Retained Earnings |
4,586,913 |
4,869,987 |
5,284,761 |
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Monthly Premium Equivalent Individual/Family |
262/781 |
285/852 |
277/827 |
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Monthly Contribution Employees Individual/Family |
0/177 |
0/179 |
0/179 |
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Monthly Contribution Retirees Individual/Family (w/Dental) |
209/625 |
228/681 |
221/661 |
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Annual Medical Deductible Individual/Family |
300/600 |
300/600 |
300/600 |
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Annual Medical Coinsurance Individual/Family |
300/600 |
300/600 |
300/600 |
Based on our recently adopted budget strategy (see memorandum dated 5/11/2005 regarding 2006 health plan budget proposal), 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. Employees would be responsible for 32.5% of the cost of dependent health care, which is in line with health care committee goals.
Effective January 1, 2006, the City will fully fund single coverage for the extraboard and part-time regular employees, as previously approved during the 2006 budget process. Should family coverage be elected, the employee will be responsible for the difference between the monthly premium equivalent for single and family contracts. Extraboard and part-time regular employee cost for family coverage would be $550.05/month, or $253.87/pay period.
3. We continue to recommend that retirees pay 80% of the monthly premium equivalent for their contracts. Retiree premium equivalents will increase approximately 5.5% from 2005 rates.
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Single |
Family |
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No Dental |
With Dental |
No Dental |
With Dental |
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2005 |
$196 |
$209 |
$584 |
$625 |
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2006 |
$206 |
$221 |
$616 |
$661 |
4. We recommend changing the terms of the health plan’s reinsurance contract. Currently, the contract covers major medical and dental coverages, and excludes prescription drug coverage. Dental expenses are typically more predictable than medical expenses; most health plans do not reinsure dental. By increasing the specific reinsurance for major medical from $75,000 to $100,000 and removing dental from both the aggregate and specific reinsurance, we anticipate achieving the best balance between premium dollar expenditure and financial protection to the City.
Most health plans reinsure the prescription drug benefit. BCBSKS reinsured the City’s prescription drug benefit until we carved it out in January of 2005. BCBSKS’ standard practice is only to reinsure a prescription drug benefit administered by them. Through the RFP process, we learned that reinsurance for a carved-out prescription drug benefit is unavailable in the market. However, we will continue to search for a means to secure reinsurance for this benefit.
5. BCBSKS demonstrated a willingness to administer our proposed new preventive benefits, whereas most of the RFP respondents did not. We see this as a good faith effort on behalf of BCBSKS to improve their flexibility in management of our health plan benefits. Generally, BCBSKS requires ASO contracts such as ours to utilize their standard products (Blue Choice, etc.), with very little tolerance for customization. We recommend negotiating that preventive services, including annual physicals, mammograms, Pap tests, and PSA tests, be paid at 100% and not subjected to comprehensive major medical deductible and coinsurance (subject to frequency and age limitations, e.g. one mammogram per year for women age 40 and older). 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.
6. Timely and appropriate reporting of utilization data is both necessary and essential for the health care committee to function effectively and better tailor the health plan and wellness program to employees’ needs. We believe the reporting package BCBSKS provides is inadequate, and it is our objective to negotiate improved reporting for the upcoming plan year. We are pleased to report that subsequent to the RFP process, BCBSKS has already made a good faith effort toward improvement in this area by providing a monthly enrollment summary.
7. The City’s current contract does not address run-out claims beyond the contract end date should the City elect to contract with another organization(s) for the services BCBSKS currently provides. During the RFP process, it became apparent that most vendors would not handle run-out claims. Therefore, we feel it would be prudent to attempt to secure services for possible administration of run-out claims with BCBSKS and establish appropriate charges in the renewal contract.
§ Comprehensive review including revisions to Summary Plan Document for upcoming plan year.
§ Review utilization report for period July 1, 2003 through June 30, 2004.
§ Research alternative provider network arrangements for future contract years after 2006.
§ Purchase risk software to develop budgeting strategies and retain consulting services of Justin Marlowe, Assistant Professor of Public Administration.
§ Attempt to secure reinsurance for prescription drug benefit.
§ Review pre-tax employee savings accounts to be used for medical expenses incurred during retirement.
§ Study session on GASB requirements, which become effective in 2007, regarding health plan funding guidelines for retiree health benefits.
§ Study session on HIPAA Security Rule, which becomes effective in April of 2006.
Affordable, quality health care remains the most valued employee benefit offered by the City of Lawrence. We committee members thank you for your continued support of our efforts to maintain such a health plan in the face of upward spiraling health care costs. At this time, the Health Care Committee seeks your support of our recommendations outlined in this memo such that we might gain City Commission approval to renew our contracts with BCBSKS and MedTrak Pharmacy Services for the 2006 health plan year.
[1] RJ Dutton, Inc, Kansas City, MO, was founded in 1995. Their target client market includes employers which range from a few hundred to several thousand employees and typically have self-funded arrangements. RJ Dutton, Inc has experience in working with and evaluating Blue Cross Blue Shield of Kansas as it compares to other alternative vendors.
2 Includes YTD interest earned.