Memorandum 14-091 Employee Health Insurance Premium Reduction

Memorandum 14-091

TO:              Mayor Wythe and Homer City Council

FROM:       Walt Wrede

DATE:        June 9, 2014

SUBJECT: Employee Health Insurance Premium Reduction

The City of Homer made major adjustments to the Employee Health Insurance Plan this year. The adjustments were made in an attempt to address rapidly rising health care costs, growing fiscal constraints, and a lack of budgetary flexibility.  It was necessary to bring the City’s health insurance plan closer to industry standards for similar employers. An important component of the amendment to the Plan was a significant increase in employee premiums. This increase caused financial hardship for many employees, especially those with families and at the lower end of the wage scale.

The Plan amendments were adopted as part of the FY 2014 Budget approval process. At the time, the Administration stated that it would review the financial status of the health insurance plan at mid-year and if utilization was trending downward and the Fund balance was growing, a reduction in premiums would be considered. Approximately five months have passed since the Plan amendments were implemented. It appears that utilization is trending downward compared to the same period last year. Also, the fund balance is slowly growing and at the end of May, was approximately $280,000. One or two large claims could wipe this out pretty quickly. Our auditors have stated that $400,000 is optimal and the right number to shoot for.

The fiscally most prudent thing to do would probably be to stay the course, get more background data over a longer period of time, and let the fund balance grow. However, I have concluded that reducing employee premiums by 20 % for the period July 1, 2014 to December 31, 2014 is a reasonable risk. Many employees have been hit hard by the new premiums and would welcome the relief, even if it turns out that the relief is only for six months. A reduction of 20% over the last six months of this year will result in a loss of $25,000 in contributions to the Fund. The determination on which direction the City takes next year regarding health insurance will be determined this fall.   

RECOMMENDATION:  Approve Resolution 14-064 reducing employee health insurance premiums by 20% for the last six months of 2014.